Holly A.

Davis
RMI 3011 - Term Paper
Due: April 1, 2009

Summary Report
on the National Flood Insurance Program

The National Flood Insurance Program (NFIP) was implemented in efforts to

reduce flood losses to property and also to reduce the loss of natural floodplain

functions. Natural floodplain functions include temporary storage of floodwaters,

moderation of peak flows, and maintenance of water quality, groundwater recharge, and

prevention of erosion.1 The 1968 Housing and Urban Development (HUD) Act

established a National Flood Insurance Program, which was conducted as a partnership

between the federal government and the private insurance industry. Congress

established the NFIP with the passage of the National Flood Insurance Protection Act of

1968 and was amended in 1973, 1994, and 2004. The NFIP’s creation was based on

the federal government’s consideration of several objectives. The key policy objectives

of the NFIP were threefold: (1) reduce the nation’s flood risk through floodplain

management; (2) improve flood hazard data and risk assessment through mapping the

nation’s floodplains; and (3) make affordable flood insurance widely available in

communities that adopt and enforce measures to make future construction safer from

flooding. Because flooding is unpredictable and catastrophic in nature, it was thought

that there was an adverse selection in the purchase of flood insurance from the private

sector, because those with the high risk were the ones most likely to purchase the

insurance. The NFIP was created in response to the cycle of increasing and repeated

costs and consequences, with no solution available through the private sector.2 Today,

1
"Natural and Beneficial Functions of a Floodplain, Flood Information, WoodRiver, Illinois (IL)." Wood River, Illinois.
<http://www.woodriver.org/FloodInfo/BenefitsofFloodplain.htm>.
2
Wetmore, French, George Bernstein, David Conrad, Cynthia DiVincenti, Larry Larson, Doug Plasencia, Russell
Riggs, Jacquelyn Monday, Michael Robinson, and Marc Shapiro. The Evaluation of the National Flood
Insurance Program Final Report. Working paper. Washington, D.C.: American Institute for Research, 2006.
 Holly A. Davis
Page 2 of 11

the NFIP reportedly saves taxpayers over $1 billion annually in flood losses that, in the

absence of the program, would otherwise have been paid by taxpayers. In March 2007,

the Flood Insurance Reform and Modernization Act of 2007 (FIRMA) was introduced in

the U.S. House. FIRMA was implemented to provide finding for mitigation activities for

individual repetitive claims properties and mandate ongoing modernization of flood

maps. It will also expand NFIP coverage by adding coverage for additional living

expenses, business interruption and basement improvements.3 On May 13, 2008,

Congress amended the National Flood Insurance Act of 1968 to extend the NFIP

though FY2013. The NFIP is open to any community that agrees to adopt and enforce

land control measurements to guide future development of the community away from

flood prone areas.

The Federal Emergency Management Agency (FEMA) works closely with the

insurance industry to facilitate the sale and servicing of flood insurance policies. Flood

insurance under the NFIP is sold to owners of property located in NFIP communities

through two mechanisms:

a. through state-licensed property and casualty insurance agents and brokers who

deal directly with FEMA and

b. through private insurance companies with a program created in 1983 known as

“Write Your Own” (WYO).

The Write Your Own (WYO) Program began in 1983. This program allows

participating property and casualty insurance companies to write and service the

Standard Flood Insurance Policy (SFIP) in their own names. These companies receive

an expense allowance for policies written and claims processed while the Federal

3
Vaughan, Emmett J., and Therese M. Vaughan. Fundamentals of Risk and Insurance. 10th ed. New York: Wiley,
2007.
 Holly A. Davis
Page 3 of 11

Government retains responsibility for underwriting losses. The WYO Program operates

as part of the NFIP, and is subject to its rules and regulations. Unlike other property

insurance, agents who write policies under the NFIP cannot bind coverage. A

purchaser of flood insurance must wait 30 days from the date the application is

completed and the premium presented before the policy becomes effective. A change in

the waiting period from 5 days to 30 days was included as part of the National Flood

Insurance Reform Act of 1994. This addressed a problem encountered where

individuals with properties on larger rivers could wait until properties many miles upriver

were flooding before purchasing coverage. There are two exceptions to this waiting

period. The waiting period does not apply to those who are making an initial purchase

of flood insurance in connection with making, increasing, extending, or renewing a loan.

It also does not apply to the initial purchase of flood insurance if the purchase occurs

during the 13-month period following the revision or update of a Flood Insurance Rate

Map.4

Congress established the NFIP to ensure the availability of flood insurance in

communities that agreed to manage flood losses. The NFIP now has nearly 4.4 million

policies, representing $623 billion in coverage in almost 20,000 communities across the

country. Approximately 60 percent of the NFIP policies are written in five gulf coast

states, including Alabama, Florida, Louisiana, Mississippi, and Texas.5 Recently, with

the high number of hurricanes causing catastrophic damage along the gulf coast,

Congress was forced to allow the NFIP to borrow from the US Treasury Department.

The cost of the NFIP program and its subsides was called in to question once the

4
Vaughan, Emmett J., and Therese M. Vaughan. Fundamentals of Risk and Insurance. 10th ed. New York: Wiley,
2007.
5
Wetmore, French, George Bernstein, David Conrad, Cynthia DiVincenti, Larry Larson, Doug Plasencia, Russell
Riggs, Jacquelyn Monday, Michael Robinson, and Marc Shapiro. The Evaluation of the National Flood
Insurance Program Final Report. Working paper. Washington, D.C.: American Institute for Research, 2006.
 Holly A. Davis
Page 4 of 11

losses to the NFIP became available. In an effort to increase the sustainability of the

NFIP, William O. Jenkins, Jr., Director, Homeland Security and Justice Issues, stated,

“Congress and the NFIP face a complex challenge in accessing potential changes in the

program that would improve it financial stability, increase participation in the program by

property owners in areas at risk of flooding, reduce the number of repetitive loss

properties in the program, and maintain current and accurate flood plain maps. These

issues are complex, interrelated, and are likely to involve trade-offs. For example,

increasing premiums to better reflect risk may reduce voluntary participation in the

program or encourage those who are required to purchase flood insurance to limit their

coverage to the minimum required amount. This in turn can increase taxpayer exposure

for disaster assistance resulted from flooding.”6 Robert Detlefsen, the Director of Public

Policy for the National Association of Mutual Insurance Companies, stated, “The critical

thing that will determine whether there is a viable market for catastrophe insurance is

whether insurers are free to charge a premium that is commensurate with the risk they

are taking.” This was an obvious problem with the NFIP which was made evident by

Hurricane Katrina,7

The NFIP is constantly faced with the task of paying claims while trying to keep

the price of flood insurance at an affordable level. It is estimated that the costs of flood

insurance claim payments was over $200 million per year on repetitive loss properties.8

In an effort to have additional sources of help to the property owners of repetitive loss,

FEMA has developed five grant programs. Most of the FEMA grants provide 75% of the

6
Challenges Facing the National Flood Insurance Program, GAO-06-174T Cong. (2005) (testimony of William O.
Jenkins, Jr., Director, Homeland Security and Justice Issues).
7
Fletcher, M. (2006), “Flooding from hurricanes pushes wave of claim reform”, BI Industry Focus,April 1.
8
Wetmore, French, George Bernstein, David Conrad, Cynthia DiVincenti, Larry Larson, Doug Plasencia, Russell
Riggs, Jacquelyn Monday, Michael Robinson, and Marc Shapiro. The Evaluation of the National Flood
Insurance Program Final Report. Working paper. Washington, D.C.: American Institute for Research, 2006.
 Holly A. Davis
Page 5 of 11

cost of a project.9 Each program has a different Congressional authorization and

different rules. The FEMA grant programs include the following:

a. Hazard Mitigation Grant Program (HMGP)

b. Flood Mitigation Assistance (FMA)

c. Pre-Disaster Mitigation Grant Program (PDM)

d. Repetitive Flood Claims (RFC)

e. Severe Repetitive Loss (SRL)

f. Increased Cost of Compliance (ICC)

Now that we have an idea about what the NFIP is and what they do, I would like

to look at several examples of how the NFIP worked in favor of the consumer and how

this program’s existence is still in question. In 1993, we saw catastrophic flooding in the

Midwest region of the United States. The 1993 Midwest flood was one of the most

significant and damaging natural disasters ever to hit the United States. Damages

totaled $15 billion, 50 people died, hundreds of levees failed, and thousands of people

were evacuated, some for months.10 Major players of this event were North Dakota,

South Dakota, Nebraska, Kansas, Minnesota, Iowa, Missouri, Wisconsin, and Illinois.

The magnitude and severity of this flood event was simply over-whelming, and it ranks

as one of the greatest natural disasters ever to hit the United States. There were over

600 river forecast points in this area that were above flood level simultaneously. In

addition there were about 150 major rivers and tributaries were also affected. At this

time, this was the most significant flood event ever to occur in the United States.11

9
"High-Risk Structures to Lose CRS Discount." NFIP/CRS Update (Winter 2007-2008). U.S. Department of
Homeland Security, FEMA. <http://www.fema.gov>.
10
The 1993 Great Midwest Flood: Voices 10 Years Later. Rep. May 2003. U.S. Department of Homeland Security
Federal Emergency Management Agency. <http://www.fema.gov/business/nfip/voices.shtm>.
11
Larson, Lee W. "The Great USA Flood of 1993." Northwest River Forecast Center. 1996.
<http://www.nwrfc.noaa.gov/floods/papers/oh_2/great.htm>.
 Holly A. Davis
Page 6 of 11

So how did the “Great Flood of 1993” affect the NFIP? One of the most

important consequences of the 1993 flooding was passage of the National Flood

Insurance Reform Act of 1994. Once the flood water had receded, it became apparent

that most homeowners in the flooded areas did not have flood insurance. In addition,

lenders had been noncompliant in checking to determine if federally backed mortgages

were being granted in flood-prone areas. The Reform Act’s intent, therefore, was to

improve compliance with the NFIP mandatory flood insurance requirement, and put

pressure on lenders to ensure that at-risk home buyers and owners in a flood zone

purchase flood insurance before receiving a federally backed mortgage. While this was

devastating to the property owners and also the government assistance programs, we

can now note that there was a significant rise in the number of flood insurance policies

from 1993 to 2003. There was approximately a 64% increase in the number of policies

purchase from these nine states in this 10 year period.12

There are many examples of how the NFIP has helped to reduce response and

recovery costs, but as we know, politics can always overshadow something that is as

costly as the NFIP. We hear about how much money is being given out to policy

holders and how the NFIP is having to borrow money in order to make this work. Not

often enough do we hear about how over the long term, the NFIP has actually helped in

saving our government money.

In 1994, FEMA’s Hazard Mitigation Grant Program (HMGP) funded 75% of the

acquisitions in Grafton, Illinois. Although the costs associated with doing this were over

$2 million, flooding in recent years in this area has caused no significant damage, and

12
The 1993 Great Midwest Flood: Voices 10 Years Later. Rep. May 2003. U.S. Department of Homeland Security
13
Federal Emergency Management Agency. <http://www.fema.gov/business/nfip/voices.shtm>. The 1993
Great Midwest Flood: Voices 10 Years Later. Rep. May 2003. U.S. Department of Homeland Security
Federal Emergency Management Agency. <http://www.fema.gov/business/nfip/voices.shtm>.
 Holly A. Davis
Page 7 of 11

the response and recovery costs have been dramatically reduced.13 Again, this

demonstrates the benefits of a well planned and coordinated buyout program and good

floodplain management. Another positive example of how this program has helped to

alleviate and reduce costs is that of Austin, Minnesota. An analysis of structures and

subsequent flood events in the Austin area revealed looses avoided of more than $3.9

million on buildings bought for $1.7 million after the 1978 flood – a retune on investment

of 129 percent.14 These are just two examples of many that show how the NFIP and

FEMA are continually working towards improvements. As I stated before, we need to

look at the long term savings as opposed to looking at the amount that is being spent

when we have a disastrous flooding event. If we can focus on the future savings in

response and recovery, we can see how important the NFIP is to the nation.

For two consecutive spring seasons, Missouri experienced devastating flash

flooding that forced hundreds of people from their homes and caused millions of dollars

in property damage to the homes and businesses. Although the flash flooding in both

events was confined to few areas, the type of devastation was equal or greater than

some of Missouri’s worst river flooding events. On May 6 and 7, 2000, a slow-moving

storm unleashed 15 inches of rain in Franklin and Jefferson Counties in less than 24

hours. The city of Union in Franklin County was among the hardest hit due to extreme

flooding from Flat Creek. In all, 10 counties were included in Presidential Disaster

Declaration MODR 1328, issued on May 12, 2000. Three counties were declared

eligible for public assistance and individual assistance, and seven others were declared

for individual assistance.15

14
The 1993 Great Midwest Flood: Voices 10 Years Later. Rep. May 2003. U.S. Department of Homeland Security
Federal Emergency Management Agency. <http://www.fema.gov/business/nfip/voices.shtm>.
15
State of Missouri - State Emergency Management Agency. Oct. 2007. <http://sema.dps.mo.gov>.
 Holly A. Davis
Page 8 of 11

I would like to give you an idea of how this flash flooding impacted some of the

families in this area. My parents owned a home in Franklin County, Missouri, which was

considered to be in a flood zone. They were required to carry flood insurance on their

home, according to the NFIP and local flood hazard management program. The home

was located in front of a small creek what was fed from the Missouri River. Prior to the

flash flooding that occurred in 2000, there were not any claims filed by my parents,

although at times there was minimal flooding (water would get close to the home, but

not actually invade). There were many people affected in this particular area, who were

not required to carry flood insurance.

As stated earlier in this report, flooding is unpredictable, and that in extreme

instances can affect anyone. A few miles from my parent’s home, there was a mobile

home sitting on a piece of property. With the high accumulation of rain in such a short

period of time and without time to absorb in to the ground, the flash flooding began.

The mobile home was picked up off of it foundation and began floating down the small

creek, which led it to become stuck under a bridge that was behind the home of my

parents. With this obstruction impeding the flow of the waters, the creek began to come

towards my parent’s house. With a couple hours they had over 8 feet of water sitting in

the lower level of the home. The waters fell over the course of the night and my parents

were left with wondering “where to begin.”

Over the course of the next few weeks, many people in the community came

together to offer assistance. At this point, they thought that they would be able to

salvage the home and little but some of its contents. In the month before this flash

flooding, my parents had increased their flood insurance policy as required by the
 Holly A. Davis
Page 9 of 11

insurance company. It had been 28 eight days since the increase of the policy. Since

the 30 day waiting period was not completed there were some issues with the insurance

company. I am not completely clear on what the specifics were at the time, but

eventually the insurance company did pay the claim. However, the NFIP and FEMA

came in after the fact and included them in an acquisition of the severely damaged

properties. Once this happened, my parents were required to “give back” the claim

money to the insurance company. FEMA did not provide my parents with additional

funds; however, they were granted a Small Business Loan in an effort to assist them in

buying a new home. At the time of this situation, there were always rumbling of how the

system was not working correctly, and how the people who did not carry flood insurance

received more assistance that those who did carry the insurance. After completing the

research for this paper, I realize that in the situation of my parents, they were given

assistance far greater than they had understood. Looking at the long term, they will not

have to face going through such a devastating event again. The NFIP and FEMA took

the burden of the flood prone area and left my parents with an opportunity.

I think that the NFIP is a complicate program. There are many aspects of the

program that are misunderstood. This program has proven to be valuable, as long as

you see it as a long term investment. Those communities who do not participate in the

NFIP and continue to build in these flood prone areas because “it will never happen to

me” are in for a shock when the inevitable happens. One of the most important things

to know is that essentially, everyone needs flood insurance. Nearly, 20,000

communities have joined the NFIP.16 There are many things that can be done to

increase knowledge about the program and it vital importance to the nation. Preventing

16
Wetmore, French, George Bernstein, David Conrad, Cynthia DiVincenti, Larry Larson, Doug Plasencia, Russell
Riggs, Jacquelyn Monday, Michael Robinson, and Marc Shapiro. The Evaluation of the National Flood
Insurance Program Final Report. Working paper. Washington, D.C.: American Institute for Research, 2006.
 Holly A. Davis
Page 10 of 11

flood damage and fostering flood insurance protects property owners and renters and

saves State and local funds. Many disasters are not severe enough to be federally

declared. There are many things that each State Commissioner can do in developing a

State policy for flood insurance. Below is a list of ten effective steps that the States can

take in order to assist in protecting constituents with insurance coverage and assisting

victims of flood disasters:17

a. Encourage licensed agents to sell flood insurance

b. Mandate NFIP continuing education for licensed agents

c. Establish a NFIP education plan for department staff and for licensing new

agents and brokers

d. Link your website to the FEMA/NFIP website

e. Assess the risks each State faces and adequacy of State capabilities to meet

them

f. Encourage insurance agents to participate in local pre-disaster prevention

activities

g. Develop an outreach program to educate consumers about the NFIP

h. Ensure mandatory disclosure on all homeowner policies that flood damage is not

covered

i. Support strong flood standards in building codes and land use decisions

j. Help ensure lender compliance

17
"National Flood Insurance Program: Top Ten Things State Insurance Commissioners Can Do." Federal Emergency
Management Agency. Apr. 2006. <http://www.fema.gov/business/NFIP>.
 Holly A. Davis
Page 11 of 11

Bibliography

Challenges Facing the National Flood Insurance Program, GAO-06-174T Cong. (2005)
(testimony of William O. Jenkins, Jr., Director, Homeland Security and Justice
Issues).

"High-Risk Structures to Lose CRS Discount." NFIP/CRS Update (Winter 2007-2008).

U.S. Department of Homeland Security, FEMA. <http://www.fema.gov>.

Larson, Lee W. "The Great USA Flood of 1993." Northwest River Forecast Center.
1996. <http://www.nwrfc.noaa.gov/floods/papers/oh_2/great.htm>.

"National Flood Insurance Program: Top Ten Things State Insurance Commissioners
Can Do." Federal Emergency Management Agency. Apr. 2006.
<http://www.fema.gov/business/NFIP>.

"Natural and Beneficial Functions of a Floodplain, Flood Information, WoodRiver, Illinois

(IL)." Wood River, Illinois.
<http://www.woodriver.org/FloodInfo/BenefitsofFloodplain.htm>.

The 1993 Great Midwest Flood: Voices 10 Years Later. Rep. May 2003. U.S.
Department of Homeland Security Federal Emergency Management Agency.
<http://www.fema.gov/business/nfip/voices.shtm>.

State of Missouri - State Emergency Management Agency . Oct. 2007.

<http://sema.dps.mo.gov>.

Vaughan, Emmett J., and Therese M. Vaughan. Fundamentals of Risk and Insurance.
10th ed. New York: Wiley, 2007.

Wetmore, French, George Bernstein, David Conrad, Cynthia DiVincenti, Larry Larson,
Doug Plasencia, Russell Riggs, Jacquelyn Monday, Michael Robinson, and Marc
Shapiro. The Evaluation of the National Flood Insurance Program Final Report.
Working paper. Washington, D.C.: American Institute for Research, 2006.