Flood insurance faces new stress
Randy Rocha of Cherry Hill, N.J., surveys a section of boardwalk destroyed by Superstorm Sandy in northern Atlantic City. The boardwalk in front of the resort city?s casinos remains intact.
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WASHINGTON -- The federal government's flood insurance program, which fell $18 billion into debt after Hurricane Katrina, is once again at risk of running out of money as the daunting reconstruction from Superstorm Sandy gets under way.
Early estimates suggest that Sandy will rank as the nation's second-worst storm for claims paid out by the National Flood Insurance Program. With 115,000 new claims submitted and thousands more being filed each day, the cost could reach $7 billion at a time when the program is allowed, by law, to add only an additional $3 billion to its onerous debt.
Congress, just this summer, overhauled the flawed program by allowing large increases in premiums paid by vacation-homeowners and those repeatedly hit by floods. But critics say taxpayer money should not be used to bail it out again -- essentially subsidizing the rebuilding of homes in risky areas -- without Congress' mandating even more radical changes.
"We are now just throwing money to support something that is going to end up creating more victims and costing more money in the future," Rep. Earl Blumenauer, D-Ore., said of the program, which insures 5.7 million homes nationwide near coasts or flood-prone rivers.
Even with the new rules, critics argue, it will be many years, if ever, before many homeowners are required to pay premiums that accurately reflect the market cost of the coverage. Some communities have long resisted imposing more appropriate building codes to prevent damage, putting the program at further risk of devastating losses when storms like Sandy hit. And despite some efforts in recent years, many of the flood maps the program relies on are out of date -- which can have expensive, and even deadly, consequences in this era of rising sea levels if homeowners are not cognizant of the risks they face.
The program's giant debt makes matters worse because simply covering the interest owed the Treasury consumes from $90 million to $750 million a year, depending on interest rates. This means it is much harder to build reserves for future catastrophes.
But others on Capitol Hill argue that the changes adopted in July are an important first step, and that Congress must give the Federal Emergency Management Agency, which runs the program, a chance to apply them before any additional changes are considered.
Already, 44 members of the House of Representatives have called for Congress to appropriate whatever money is needed to help victims recover from Hurricane Sandy, and aides on Capitol Hill say that -- under such extreme losses -- they expect lawmakers will do what they have to do to keep the program solvent -- even amid a federal budget crisis.
The federal government's flood insurance program collects about $3.5 billion in annual premiums. But in four of the past eight years, claims will have eclipsed premiums, most glaringly in 2005 -- the year of Hurricanes Katrina, Rita and Wilma -- when claims totaled $17.7 billion. Private insurance companies have long avoided offering flood insurance to homeowners.
"It's like rat poison to them," said Tony Bullock, an insurance industry lobbyist, explaining how the risk outweighs the benefit for private insurers. "You need the federal backstop."
The pending costs for Hurricane Sandy would have been even higher if a greater share of residents along the East Coast had signed up for the insurance, which is voluntary outside the 100-year-flood zones. There would also have been more premium dollars, although not enough to pay the claims.
The fact that many homeowners hit by Sandy have no flood or homeowners insurance could prompt Congress to provide assistance to the uninsured, too, as happened after Katrina, further raising the cost to the federal Treasury.
Officials in New Jersey and New York say the federal government must move quickly to put the flood insurance program back on stable footing, even if it means increasing the federal deficit.
Hurricane Katrina put the program so deeply into debt that federal officials have acknowledged they will never be able to fully repay the $18 billion Treasury-financed loan that bailed the program out.
First Published November 13, 2012 12:00 am