Hurricane Harvey may add to debt woes of US flood insurance program

Pic Courtesy: Reuters

The destruction that heavy rain and floods from Hurricane Harvey could inflict on Texas would add to the pile of debt owed by a federal flood insurance program that is due to expire in September, advocacy groups said.

The National Flood Insurance Program (NFIP) owes $24.6 billion to the Treasury. Most of it covered claims from Hurricane Katrina in 2005, Superstorm Sandy in 2012, and floods in 2016, the program’s third most severe loss-year on record with losses exceeding $4 billion, according to the Federal Emergency Management Agency (FEMA), which manages it.

The NFIP was extended 17 times between 2008 and 2012 and lapsed four times in that period. A 2012 law extended the program to September.

The only source of flood insurance for most Americans, it will be in place for homeowners and businesses in Harvey`s path along the central Texas coast.

But Harvey-related claims covered under the program could push it deeper into the red and possibly toward its borrowing limit of just over $30 billion, said Steve Ellis, vice president of Taxpayers for Common Sense, a nonpartisan budget watchdog in Washington, DC.

Federal law requires that homes in flood-risk areas have flood insurance before a mortgage can be completed. The program is the only flood insurance available to the vast majority of Americans, although a small market for private flood insurance is sprouting in flood-prone states such as Florida.

Homebuilders, the real estate industry, and property owners in coastal communities have also long favored the program, which offers subsidized rates to many policyholders.

Advocates for reforming the program, which is administered by FEMA, said that Harvey`s arrival so close to the program`s September 30 expiration date could move lawmakers to action.

"It would be our hope that this storm lights a fire under Congress to make reforms to the program," said Laura Lightbody, project director for flood preparedness at the Pew Charitable Trusts, a non-partisan public policy group.

"Right now, it`s not on a sustainable path and carries a lot of other problems with it," Lightbody said. For example, she said, the program encourages development in flood-prone areas by making it easier to get insurance.

There are about 435,000 NFIP policyholders in shoreline communities of Texas, according to a Pew analysis of flood exposure data from the National Oceanic and Atmospheric Administration.

The NFIP would have to pay claims from premiums it receives, if it exhausts its current borrowing limit, Ellis said. That could slow down processing, unless Congress agreed to an increase. But it is unlikely that Harvey claims would wipe out NFIP`s borrowing authority, Ellis said.

The FEMA spokeswoman declined to comment on the NFIP borrowing limit or what would happen if it was exceeded.

Political Fix

US lawmakers have been considering legislative actions to reform the NFIP, including updating US government flood zone maps, making more coverage available through private insurers and limiting or excluding coverage through the program for certain high risk properties.

The government has said it is impossible for the NFIP to repay its debt. 

There is bipartisan support to modernize the program and Senate and House lawmakers have held at least six hearings this year about ways to do it. At the same time, many groups have been lobbying for special interests.

The National Association of Homebuilders said in June that it had worked with lawmakers to eliminate a provision from one bill that would have ended NFIP coverage for new homes constructed in so-called "100-year flood zones," areas estimated to have a one percent chance of flooding each year.

Professional risk managers are among those pushing Congress to extend the program beyond September to buy time for reforms. 

Many businesses and institutions have building loans and leases that require NFIP flood policies, which would not be in effect if the program lapses, said Elizabeth Guimaraes, risk management director at Nova Southeastern University in Fort Lauderdale, Florida. 

"We’re talking all across the board, people not being in compliance with loans and leases. It`s a huge problem," said Guimaraes, who is also a spokeswoman for the Risk Management Society (RIMS).