A Clear-Eyed View of Flood Insurance Policy

Zoe Miller
National Center for Atmospheric Research

Policy evaluations matter because they inform decision makers about the success or failure of government programs. Ideally, they help legislators and program administrators know whether to keep, change, or eliminate expensive programs. Too often, though, legislative oversight is lacking. As big programs become institutionalized, the evaluation task becomes extraordinarily challenging, both technically and politically.

The U.S. National Flood Insurance Program (NFIP) dramatically illustrates these challenges. Since 1968 the NFIP has enabled the federal government to provide flood insurance to residents in communities that regulate land use in floodplains. The NFIP, like all governmental insurance programs, uses insurance to meet broad social objectives-unlike private insurance, which is designed to be financially profitable and actuarially sound. With commitments to policyholders of $325 billion (1997$), the program is the sixth largest of 12 federal insurance programs. The scope of the program is enormous: 19,000 communities are members, and as of September 1999, there were over 4 million flood insurance contracts in force.

In the 32 years of NFIP implementation, it has never been comprehensively evaluated. This is surprising, especially in light of the following facts:

1. As of May 1999, the NFIP owed $738 million (1999$) to the U.S. Treasury. The program must borrow from the treasury periodically when programmatic outlays exceed premium payments because the program is subsidized by the government and is, by design, actuarially unsound. The program deficit has led to calls to make flood insurance actuarially sound. Most notably of late, the Bush Administration's 2002 budget calls for removal of the subsidy for non-primary residences.

2. The flood insurance program pays for losses that occur at different times to the same structure. The General Accounting Office (GAO) reported that the program paid 36% of all historical claims to multiple loss properties-about $200 million annually. The National Wildlife Federation reported that over the period 1978 to 1995, repetitive loss properties were 2% of all NFIP properties, but these properties experienced 25% of all NFIP losses, resulting in 40% of flood insurance payments.

3. In spite of efforts to encourage U.S. citizens to purchase flood insurance, market penetration is low. Although the Federal Insurance Administration estimates that there are 8 million structures in the floodplain, only about 4 million flood insurance contracts are in force.

4. The Federal Emergency Management Agency (FEMA oversees the NFIP), in contrast with some critics, claims that the NFIP plays a major role in reducing flood damage, stating that it "helps reduce flood damage by nearly $800 million a year. Further, buildings constructed in compliance with NFIP building standards suffer 77% less damage annually than those not built in compliance. And, every $3 paid in flood insurance claims saves $1 in disaster assistance payments."

In 2000, FEMA began planning for an evaluation of the NFIP and contracted with a private vendor to complete a research design for the evaluation. The design will be complete this year. If all goes according to the plan established before the end of Clinton's term, the actual evaluation will be completed by a non-government entity in two to five years.

The evaluators of the NFIP have a difficult task ahead. First they will have to choose baselines against which to measure the program's success. From its outset, the program's purpose was to "minimize exposure" of property to flood damage. But the NFIP's enacting legislation never clarified whether exposure should be measured from 1969, another date, or against a counterfactual scenario in which the NFIP was not implemented. Another technical challenge is that of data collection. A lack of systematic data concerning the level of societal vulnerability to floods currently hampers evaluation of flood policy because there is no single agency in the United States whose mission is to collect these data. For example, the GAO reported recently that although participation rates should be used as one of the gauges to measure program success, "better data are needed on the total number of structures in flood-prone areas. FIA tracks the number of insurance policies in these areas, but data on the overall number of structures are incomplete and inaccurate."

But an even bigger challenge for the NFIP evaluation is political. A comprehensive evaluation will be a waste of taxpayer money if, when complete, it is left on a shelf to collect dust. Officials in FEMA must ensure that the results of the evaluation make it onto Congress' agenda. Congressional decision makers should use the results of the evaluation to improve the program. Making changes to the NFIP may require great political will since the NFIP affects so many constituents.

In the near-term, the Bush Administration must ensure that the evaluation is completed, that it is independent and accessible, that it is comprehensive, and that it provides a clear view of the successes and failures of the program. Although the impetus for the evaluation came from an administration with a different political ideology than that of the current administration, the motivation for an evaluation of the NFIP should be nonpartisan. An evaluation is needed to provide for the best use of taxpayer money, while ensuring the wisest possible use of floodplain land.

Finally, politicians and pundits should resist the urge to make assumptions about the success of the program before the evaluation is completed. For example, current political wisdom seems to be that the NFIP would be successful if it paid for itself every year, in spite of the fact that the program is by design dependent on taxpayer money in heavy loss years and programmatic goals do not depend on financial stability. The Bush Administration's 2002 budget suggests certain reforms to the program to fix the design, "which undermines the financial stability of the insurance program." Before changes are made to the NFIP, an evaluation is needed to determine whether the legislative goals laid out in 1968 make sense given the current context, or whether they should be changed. If changes to the program are indeed needed, then policy success will be enhanced with the insight provided by a rigorous, independent evaluation of NFIP performance to date.

– Zoe Miller
Environmental and Societal Impacts Group
National Center for Atmospheric Research
zmiller@ucar.edu

Comments? thunder@ucar.edu

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