Last Updated 7/7/2020
Issue: Floods are the most common and most destructive natural disaster in the United States. Ninety percent of all natural disasters involve flooding, and all 50 states have experienced floods or flash floods in the past five years, according to Floodsmart.gov. The damage from a flood is not covered under a standard homeowner's policy. Flood insurance is a special policy that is federally backed by the National Flood Insurance Program (NFIP) and available for homeowners, renters, and businesses.
Background: The NFIP was created as a result of the passage of the National Flood Insurance Act of 1968. Congress enacted the NFIP primarily in response to the lack of availability of private insurance and continued increases in federal disaster assistance due to floods. At the time, flood was viewed as an uninsurable risk and coverage was virtually unavailable from private insurance markets following frequent widespread flooding along the Mississippi River in the early 1960s. The NFIP is a Federal program, managed by the Federal Emergency Management Administration (FEMA), and has three components: to provide flood insurance, to improve floodplain management and to develop maps of flood hazard zones.
The NFIP allows property owners in participating communities to buy insurance to protect against flood losses. Participating communities are required to establish management regulations in order to reduce future flood damages. This insurance is intended to furnish as an insurance alternative to disaster assistance and reduces the rising costs of repairing damage to buildings and their contents caused by flood. A homeowner is able to purchase excess flood insurance, but they must be covered by NFIP flood insurance first. Information detailing how to obtain flood insurance can be found at www.floodsmart.gov .
Since NFIP's inception, additional legislation has been enacted to strengthen the program, ensure its fiscal soundness and inform its mapping and insurance rate-setting. More recently:
- On July 6, 2012, the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) was signed into law. BW-12 reauthorized the NFIP through Sept. 30, 2017, and made a number of reforms aimed at making the program more financially and structurally sound. The purpose of the legislation was to change the way the NFIP operates and to raise rates to reflect true flood risk, as well as make the program more financially stable. As implementation moved forward, constituent concerns over flood insurance premium increases prompted legislative efforts to modify some of the BW-12 reforms.
- On March 21, 2014, the Homeowner Flood Insurance Affordability Act of 2014 was signed into law, which repeals and modifies certain BW-12 provisions and makes additional program changes to other aspects of the NFIP. According to FEMA, the law lowers the rate increases on some policies, prevents some future rate increases, and implements a surcharge on all policyholders. It also repeals certain rate increases that have already gone into effect and provides for refunds to those policyholders.
Click here for an overview of the Homeowner Flood Insurance Affordability Act of 2014.
Private Flood Insurance
The Flood Insurance Market Parity and Modernization Act was introduced as HR.2901 in 2015 and S.563 in 2017 to help facilitate the development of the private flood market.
While the market for private flood insurance remains relatively small, in recent years, more sophisticated risk mapping and modeling have developed, enabling the private market to more accurately price the risk and generating new interest among private insurers to provide such coverage. Although BW-12 affirmed Congress’s intent that lenders can accept private flood insurance as an alternative to the NFIP, the definition and prescriptive conditions have created a significant obstacle impeding the development of a private market.
Status: On Dec. 20, 2019, Congress reauthorized the NFIP through Sept. 30, 2020. The program has had numerous short-term extensions and proposed reform measures. The NAIC and state insurance regulators support a long-term reauthorization of the NFIP to avoid short-term extensions and program lapses that create uncertainty in both the insurance and housing markets. On July 6, 2020, the NAIC sent a letter to Congressional leaders urging action on a long-term NFIP reauthorization prior to the Sept. 30, 2020 expiration.
The NAIC's July 6th letter to Congress also encourages growth in the private flood insurance market, as well as emphasizing investment in disaster mitigation measures. Congress faces the challenge of trying to maintain a balance between improving the financial solvency of the NFIP and reducing taxpayer exposure while also being mindful of affordability concerns. Additionally, the NAIC encouraged federal support for disaster mitigation programs and incentives such as premium discounts or insurance rate reductions to persons who build, rebuild, or retrofit their properties to mitigate flood damage.
The NAIC Property and Casualty (C) Committee was charged with creating a best practices document to help facilitate the private flood insurance market. This document was drafted by the NAIC Catastrophe Insurance (C) Working Group and has been adopted by the Working Group, as well as the Property and Casualty (C) Committee.
In 2017, the NAIC Center for Insurance Policy and Research (CIPR) released the study Flood Risk and Insurance, which examines the rising flood risk in the country and the need to overhaul the NFIP while encouraging greater growth in the private flood insurance market. The NAIC has also placed increased focus on educating the public about potential damages and insurance claims related to floods. More details about flood insurance are available at the NAIC's consumer website.
Committees Active on This Topic
NFIP: Fiscal Exposure Persists Despite Property Acquisitions (U.S. Government Accountability Office, June 25,2020)
COVID-19 Pandemic Operational Guidance for the 2020 Hurricane Season (FEMA, May 2020)
Spotlight on: Flood Insurance (Insurance Information Institute, March 24, 2020)
Considerations for State Insurance Regulators in Building the Private Flood Insurance Market (NAIC Property & Casualty (C) Committee, Dec. 9, 2019)
Innovation in Flood Insurance: Models, Data, and New Views of Risk (NAIC Insurance Summit presentation, 2019)
National Flood Insurance Program Desk Reference
October 1, 2017 FEMA
NAIC NFIP Guiding Principles
October 19, 2016
NFIP: Financial Soundness and Affordability
September 2017, Congressional Budget Office (CBO)
Flood Risk and Insurance (CIPR Study, 2017)
The State of the National Flood Insurance Program: Treading Water or Sinking Fast? (Journal of Insurance Regulation, 2014)
Make a Plan to Reduce Your Flood Risks (June 2020)
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