History of the National History of the National Flood Insurance Program Flood Insurance Program

1968-20101968-2010

Topic ObjectivesTopic Objectives

1.1. To give some idea of the many, many To give some idea of the many, many issues that have been grappled with to issues that have been grappled with to create and manage the NFIP, and to keep create and manage the NFIP, and to keep it successfulit successful

2.2. To give the person who would really like To give the person who would really like to help out, resources that can be studied to help out, resources that can be studied to learn why the NFIP operates as it doesto learn why the NFIP operates as it does

3.3. To remind that persons who do not learn To remind that persons who do not learn their history are doomed to repeat ittheir history are doomed to repeat it

The Needs – People vs. The Needs – People vs. HurricanesHurricanes

• The Starting Point The Starting Point is not 1968is not 1968

• Consider Galveston Consider Galveston in 1909in 1909

• No Flood InsuranceNo Flood Insurance• No effort to No effort to

mitigate loss to life mitigate loss to life and propertyand property

The Needs – People vs. The Needs – People vs. RiversRivers• River flooding River flooding

causes as much causes as much damage as damage as hurricaneshurricanes

• Consider where Consider where hurricanes go after hurricanes go after landfalllandfall

• Consider the 1927 Consider the 1927 FloodFlood

• These things These things willwill happen againhappen again

Study, Study, Study – Private Study, Study, Study – Private StudiesStudies

• The American The American Insurance Insurance Association Study of Association Study of 19561956

• Private industry Private industry cannot do itcannot do it

• Reason: Only those Reason: Only those at highest risk buy itat highest risk buy it

• This hasn’t changedThis hasn’t changed

Study, Study, Study – Public Study, Study, Study – Public StudiesStudies

• President Johnson’s President Johnson’s 1967 Report to 1967 Report to CongressCongress

• Four Possibilities Four Possibilities - Purely Private- Purely Private- Private but - Private but Government Government

backed backed - Purely Government- Purely Government- Government with - Government with

Private assistancePrivate assistance

National Flood Insurance Act of National Flood Insurance Act of 19681968• Part of the HUD Act of 1968 with the Urban Part of the HUD Act of 1968 with the Urban

Property Protection & Reinsurance Act of 1968 Property Protection & Reinsurance Act of 1968 (created the position of Federal Insurance (created the position of Federal Insurance Administrator)Administrator)– Regular ProgramRegular Program– Emergency Program – created in 1969Emergency Program – created in 1969– Insurance sold by National Flood Insurers Insurance sold by National Flood Insurers

Association (NFIA) – Premium equalization Association (NFIA) – Premium equalization payments paid annually to offset premium payments paid annually to offset premium shortfallshortfall

– No initial capitializationNo initial capitialization– Mudslide coverage added in 1969Mudslide coverage added in 1969

Program StructureProgram Structure

• Regular ProgramRegular Program– Flood Insurance made available in exchange Flood Insurance made available in exchange

for community enforcement of FPM standardsfor community enforcement of FPM standards– Subsidized rates for existing Subsidized rates for existing

structures/actuarial rates for new structures structures/actuarial rates for new structures – Flood Insurance Rate Study and Map (FIRM)Flood Insurance Rate Study and Map (FIRM)

• Emergency Program - 1969Emergency Program - 1969– Limited amounts of insuranceLimited amounts of insurance– Subsidized rates onlySubsidized rates only– Flood Hazard Boundary Maps (FHBM)Flood Hazard Boundary Maps (FHBM)

Tropical Storm Agnes - 1972Tropical Storm Agnes - 1972

• Hit Southern Tier of NY, Hit Southern Tier of NY, Northeast/Central PA, MD, DC, VANortheast/Central PA, MD, DC, VA

• Very little flood insurance in force – Very little flood insurance in force – Wilkes-Barre, PA had 29 policiesWilkes-Barre, PA had 29 policies

• Highlighted the need for incentives Highlighted the need for incentives to participate and to buy flood to participate and to buy flood insuranceinsurance

Flood Insurance Protection Act Flood Insurance Protection Act of 1973of 1973• Established Mandatory Purchase RequirementsEstablished Mandatory Purchase Requirements• Required FIA to notify all flood-prone communities (approx. Required FIA to notify all flood-prone communities (approx.

20,000) by June 30, 1974 of their special flood hazard areas 20,000) by June 30, 1974 of their special flood hazard areas (SFHA)(SFHA)

• Notification done in the form of a Flood Hazard Boundary Notification done in the form of a Flood Hazard Boundary Map (FHBM)Map (FHBM)

• Communities required to participate within one year of Communities required to participate within one year of notification or be denied Federal assistance and Federally-notification or be denied Federal assistance and Federally-backed mortgages in SFHAbacked mortgages in SFHA

• Eagleton Amendment (1975) exempted conventional Eagleton Amendment (1975) exempted conventional mortgage loansmortgage loans

• Increased policy limitsIncreased policy limits• Added erosion coverage because of rising levels of the Added erosion coverage because of rising levels of the

Great LakesGreat Lakes

FIA/NFIA Dispute - 1977FIA/NFIA Dispute - 1977

• Dispute over program authority and financial Dispute over program authority and financial controlcontrol– FIA position – Secretary of HUD, not NFIA, had FIA position – Secretary of HUD, not NFIA, had

ultimate authority over program policy and ultimate authority over program policy and authority to audit NFIA financial recordsauthority to audit NFIA financial records

• FIA opted to exercise Part B of 1968 Act – all FIA opted to exercise Part B of 1968 Act – all Federal program using industry resourcesFederal program using industry resources

• EDS served as NFIP Servicing Agent EDS served as NFIP Servicing Agent • Began a period of tension with the private Began a period of tension with the private

insurance industryinsurance industry

FEMA - 1979FEMA - 1979

• Brought into FEMA:Brought into FEMA:– Federal Insurance Administration (HUD)Federal Insurance Administration (HUD)– Federal Disaster Assistance Administration Federal Disaster Assistance Administration

(HUD)(HUD)– United States Fire Administration United States Fire Administration

(Commerce)(Commerce)– Federal Preparedness Administration (GSA)Federal Preparedness Administration (GSA)– Defense Civil Preparedness Administration Defense Civil Preparedness Administration

(DOD)(DOD)

1980’s1980’s

• Two key goals:Two key goals:– Make the NFIP self-supporting for the Make the NFIP self-supporting for the

average historical loss year by 1988 average historical loss year by 1988 (reached goal in 1986)(reached goal in 1986)

– Re-involve the insurance industry in the Re-involve the insurance industry in the NFIP (Write Your Own Program)NFIP (Write Your Own Program)

Self-supporting GoalSelf-supporting Goal

• Required gradual increase in subsidized ratesRequired gradual increase in subsidized rates– Basement limitations on finished portionsBasement limitations on finished portions

• Appropriations required to repay funds borrowed Appropriations required to repay funds borrowed in 1970’s and 1980’s ($1.2 billion)in 1970’s and 1980’s ($1.2 billion)

• Revised V-Zone methodology to reflect wave Revised V-Zone methodology to reflect wave surgesurge

• Hurricane Alicia (1983) – resulted in denying Hurricane Alicia (1983) – resulted in denying coverage for illegal enclosures in V-Zonescoverage for illegal enclosures in V-Zones

• Federal Policy Fee established in 1986 to pay Federal Policy Fee established in 1986 to pay NFIP expenses previously paid by appropriationsNFIP expenses previously paid by appropriations

Reinvolvement of Insurance Reinvolvement of Insurance IndustryIndustry

• Write Your Own (WYO) Program created in Write Your Own (WYO) Program created in 19831983

• NFIP Servicing contract moved from EDS NFIP Servicing contract moved from EDS to CSC – required dual role of operating to CSC – required dual role of operating NFIP Direct Program and providing bureau NFIP Direct Program and providing bureau and statistical support to WYO companies and statistical support to WYO companies and FIAand FIA

WYO ProgramWYO Program

• 80+ private insurance companies – sell 80+ private insurance companies – sell and service NFIP policies under their own and service NFIP policies under their own namename

• Expense Allowance – 30% of premiumExpense Allowance – 30% of premium– 15% agents commission15% agents commission– 13% company expenses13% company expenses– 2% State premium tax2% State premium tax– Based on A.M. Best Aggregates and AveragesBased on A.M. Best Aggregates and Averages

• WYO ArrangementWYO Arrangement

Midwest Floods – 1993Midwest Floods – 1993

• Very low market penetration – only Very low market penetration – only about 10% of damaged properties about 10% of damaged properties insured against floodinsured against flood– Highlighted need for stricter lender Highlighted need for stricter lender

compliance and marketingcompliance and marketing

• Galloway Study and ReportGalloway Study and Report– Highlighted the need for better Highlighted the need for better

community compliance and flood community compliance and flood mitigationmitigation

National Flood Reform Act of National Flood Reform Act of 19941994

• Strengthened mandatory purchase Strengthened mandatory purchase requirements – penalties on lenders requirements – penalties on lenders for non-compliancefor non-compliance

• Increased Cost of Compliance (ICC) Increased Cost of Compliance (ICC) coverage added to policy for coverage added to policy for substantially-damaged structuressubstantially-damaged structures

• Created Flood Mitigation Assistance Created Flood Mitigation Assistance Fund (funded by Federal Policy Fee)Fund (funded by Federal Policy Fee)

• Community Rating System (CRS)Community Rating System (CRS)

Map Modernization ProgramMap Modernization Program

• Inadequacy of funding from Federal Policy Inadequacy of funding from Federal Policy Fee to update maps ($50 million per year)Fee to update maps ($50 million per year)

• First program appropriation since 1986First program appropriation since 1986

• As of Sept. 2009, 81% of the nation’s As of Sept. 2009, 81% of the nation’s population had a new final or draft FIRMpopulation had a new final or draft FIRM

• Map Mod has now evolved into RiskMapMap Mod has now evolved into RiskMap

SFIP Rewrite Project in 2000SFIP Rewrite Project in 2000

• The flood policy is both a contract The flood policy is both a contract and a federal regulation – it has both and a federal regulation – it has both carrots and stickscarrots and sticks

• Rewritten pursuant to President Rewritten pursuant to President Clinton’s plain language initiativeClinton’s plain language initiative

• Express Preemption Clause clarified Express Preemption Clause clarified to bar state bad faith claimsto bar state bad faith claims

Hurricane Isabel - 2003Hurricane Isabel - 2003

• Highlighted need for better agent Highlighted need for better agent trainingtraining

• Lack of consumer knowledge of NFIP Lack of consumer knowledge of NFIP and insurance principlesand insurance principles

• The unenviable position of the state The unenviable position of the state insurance commissionersinsurance commissioners

• The Moffett & Howell lawsuitsThe Moffett & Howell lawsuits

Flood Insurance Reform Act of Flood Insurance Reform Act of 20042004

• Severe repetitive lossSevere repetitive loss– DefinitionDefinition– FundingFunding

• Summary of Coverage, including Summary of Coverage, including claims historyclaims history

• Claims Handbook – explains claims Claims Handbook – explains claims adjustment processadjustment process

• Claims Appeal ProcessClaims Appeal Process

Hurricane Katrina - 2005Hurricane Katrina - 2005

• 166,000 losses166,000 losses

• $16 billion paid$16 billion paid

• $16 billion borrowed from Treasury$16 billion borrowed from Treasury

Post Katrina Hearings and Post Katrina Hearings and InvestigationsInvestigations

• Evaluated Program’s response to its Evaluated Program’s response to its most difficult challengemost difficult challenge

• Reviews by: CongressReviews by: Congress State State A.G.’sA.G.’s

GAOGAO MediaMedia

FEMA – IGFEMA – IG Trial Trial LawyersLawyers

NFIP 2009 Listening MeetingNFIP 2009 Listening Meeting

• FEMA reached out for new ideasFEMA reached out for new ideas

• Interested Groups were many and Interested Groups were many and variedvaried

• An example of American Government An example of American Government at its finestat its finest

• It was also why we concluded we It was also why we concluded we needed to teach our historyneeded to teach our history

Where From HereWhere From Here

Please get involved, but also,Please get involved, but also,

please learn our history.please learn our history.

Please help us move forward, but Please help us move forward, but also,also,

please learn where we’ve been,please learn where we’ve been,

and why.and why.