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Got flood insurance?

By Jay MacDonald · Bankrate.com
Wednesday, June 2, 2010
Posted: 2 pm ET

If you own one of the 5 million U.S. homes and businesses required to carry flood insurance under the National Flood Insurance Program, or NFIP, you may soon breathe a sigh of relief if the progress made recently on Capitol Hill toward a five-year flood insurance extension bears fruit.

One of the more heartburn-inducing aspects of flood insurance for consumers has been the propensity of Congress to fiddle around with short-term program extensions, leaving homebuyers, sellers, Realtors and insurance agents in a bind during lapses in authorization.

Flood insurance is required before a home in a designated flood zone can be sold. When NFIP authorization expires, policies cannot be written, which short-circuits home sales across the country.

But there's hope. The House Financial Services Committee recently green-lighted the Flood Insurance Reform Priorities Act, moving it one step closer to a more stable, sustainable future.

The act would extend NFIP authorization for five years, phase out premium subsidies for second homes and vacation homes, mandate administrative changes, and delay implementation of new flood zone maps so that homeowners newly included in a flood zone would not face an unanticipated insurance expense in addition to their homeowners insurance.

The costly hurricane seasons of 2004 and 2005 blew a Katrina-sized hole in the $2.3 billion bucket of cash that NFIP collects each year in premiums to insure homes in flood zones. Once the waters receded, the Federal Emergency Management Administration which oversees NFIP faced a flood of questions themselves about the sustainability of the program in general (it is currently $18.8 billion in debt) and its public-private write-your-own (WYO) program in particular.

In its August 2009 report, "Flood Insurance: Opportunities Exist to Improve Oversight of the WYO Program," the Government Accountability Office took a hard look at how FEMA keeps watch (or not) over some 90 insurance companies that peddle NFIP policies. It didn't like what it saw.

In follow-up testimony, Orice Williams Brown, GAO director of financial markets and community investment told lawmakers that NFIP is "by design, not actuarially sound."

Brown pointed out that NFIP is not structured to do things that most insurance companies do to mitigate risk, such as build a surplus fund or purchase reinsurance to cover catastrophic losses. And he questioned the WYO system that pays out between one-third and two-thirds of its annual premiums to the participating insurance companies.

This year's model of NFIP reform won't solve the flood program's myriad problems. But if it only manages to extend NFIP's authorization for five years, maybe lawmakers can then find the time to build a better beast.

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