Midwest Flooding Disaster: Rethinking Federal Flood Insurance?

Midwest Flooding Disaster: Rethinking Federal
Flood Insurance?
Updated August 25, 2008
Rawle O. King
Analyst in Financial Economics and Risk Assessment
Government and Finance Division

Midwest Flooding Disaster:
Rethinking Federal Flood Insurance?
Historically, floods have caused more economic loss to the nation than any other
form of natural disaster. In 1968, Congress created the National Flood Insurance
Program (NFIP) in response to rising flood losses and escalating costs resulting from
ad-hoc appropriations for disaster relief. Federal flood insurance was designed to
provide an alternative to federal disaster relief outlays by reducing the rising federal
costs through premium collection and mitigation activities. The purchase of flood
insurance was considered to be an economically efficient way to indemnify property
owners for flood losses and internalize the risk of locating investments in the
Despite massive rainfall-river flooding in several Midwestern states along the
upper Mississippi River and its tributaries in June 2008, damages for the most part
are not expected to produce significant insured flood losses under the NFIP. This
significant but not unprecedented flood event instead will likely cost several billions
in uninsured damages that will probably remain uncompensated or be paid through
federal emergency supplemental appropriations for disaster relief.
A key lesson learned from the 1993 and 2008 Midwest floods is that many
people believe that the government will provide them with economic assistance
despite their lack of insurance. What then is the appropriate role of the federal
government in dealing with ambiguous risks, where the insurance industry is
reluctant to offer coverage and homeowners and businesses demonstrated a
reluctance to purchase coverage, even when it is mandatory? This question is
important for the long-term solvency of the NFIP and overall future costs to federal
This report examines the impact of the 2008 Midwest floods on the National
Flood Insurance Program (NFIP) in the context of congressional efforts to
reauthorize and modify the program before its authorization expires on September
30, 2008. The report begins with an assessment of the risk of flooding in the United
States and why Congress might move to rethink the current multifaceted approach
to federal flood insurance. Members might, for example, opt to assess possible
insurance requirements for individuals living behind levees, eliminate premium
subsidization of certain “grandfathered” properties, expand the NFIP to offer
coverage against both flood and wind damages, and consider undertaking a
nationwide flood insurance study (FIS) and remapping of the nation’s floodplains,
including areas behind levees and other flood control structures. The report
concludes with lessons learned from the 1993 and 2008 Midwest floods, and an
analysis of the NFIP’s current financial conditions and major policy issues, as well
as a summary of legislative proposals — H.R. 3121 and S. 2284 — pending before
the 110th Congress.
The report will be updated as events warrant.

Introduction ......................................................1
The U.S. Risk of Flooding...........................................3
Is It Appropriate to Rethink Federal Flood Insurance?.....................5
Background on the NFIP........................................5
Challenges Facing the NFIP......................................6
Midwest Floods of 2008............................................7
Lessons Learned from Previous Floods................................10
The 1993 Midwest Floods......................................10
The 2005 Hurricanes..........................................11
The 2008 Midwest Floods......................................11
Financial Status of NFIP...........................................13
Policy Issues.....................................................15
Long-Term Financial Solvency..................................15
Premium Subsidies.......................................15
Solvency and Actuarial Soundness...........................16
Risk Assessment and Flood Hazard Maps......................18
Accountability for Write-Your-Own Companies.....................19
Multiple-Peril Coverage for Wind and Flood Damages ...............20
Legislative Response..............................................21
List of Tables
Table 1. Federal Flood Insurance Policies Issued and Claims Paid to
Midwestern States: 1988-2007 and June 2008.......................8
Table 2. Top Fifteen Significant Flood Events Covered in the National
Flood Insurance Program........................................9
Table 3. Ten States with the Highest Federal Flood Insurance Claims
Payments: 1988-2007..........................................10
Table 4. History of U.S. Treasury Borrowing Under the National Flood
Insurance Program............................................14

Midwest Flooding Disaster:
Rethinking Federal Flood Insurance?
This report examines the impact of the 2008 Midwest floods on the National
Flood Insurance Program (NFIP) in the context of congressional efforts to
reauthorize and modify the program before its authorization expires on September
30, 2008. The report begins with an assessment of the risk of flooding in the United
States and why Congress might move to rethink the current approach to federal flood
insurance. Members might, for example, opt to assess possible insurance
requirements for individuals living behind levees, eliminate premium subsidization
of certain “grandfathered”properties, expand the NFIP to offer coverage against both
flood and wind damages, and consider undertaking a nationwide flood insurance
study (FIS) and remapping the nation’s floodplains, including areas behind levees
and other flood control structures. The report concludes with lessons learned from
the 1993 and 2008 Midwest floods and 2005 hurricanes, and an analysis of the
NFIP’s current financial conditions and major policy issues, as well as a summary of
legislative proposals — H.R. 3121 and S. 2284 — pending before the 110th Congress.
Despite massive rainfall-river flooding in several Midwestern states along the
upper Mississippi River and its tributaries in June 2008, damages for the most part
are not expected to produce significant insured flood losses under the National Flood
Insurance Program (NFIP). This extensive but not unprecedented flood event instead
will likely cost several billions in uninsured damages that will probably remain
uncompensated or be paid through federal emergency supplemental appropriations
for disaster relief.
Relatively few NFIP claims (6,338) had been filed as of June 30, 2008.
Insurance policies sold by private insurers generally do not insure for the flood peril.
Without federal flood insurance or private insurance, flood victims typically finance
flood damage repair costs on their own (self-insure), claim a tax credit for property
loss on their individual returns and, in the event of a presidentially declared major
disaster, pay a portion of the uninsured losses with federal disaster relief assistance.
Federal assistance is usually provided to eligible individuals and businesses
under section 408 of the Robert T. Stafford Disaster Relief and Emergency1
Assistance Act, as amended by the Disaster Mitigation Act of 2000. Flood-prone

1 Following a presidentially declared disaster, individuals and households who have no
insurance or are under-insured have recently been provided a variety of federal assistance,
including grants for temporary housing and home repairs, low-cost loans to cover uninsured

residents might also be eligible for voluntary buyouts under the Hazard Mitigation
Grant Program (HMGP) that funds property acquisitions to mitigate future flood
disaster losses.2 After the 1993 Midwest floods, approximately 12,000 properties in
nine Midwestern states were bought out by the government and about 500 other
structures were relocated or elevated. Buyouts are again being considered in five
state affected by the 2008 floods: Missouri, Iowa, Wisconsin, Indiana and Illinois.3
Occurring less than three years after the widespread devastation — floods, storm
surge and breached levees — caused by Hurricanes Katrina and Rita, the 2008
Midwest flood has once again brought to the forefront of public awareness
weaknesses in the nation’s flood management system. The 2008 floods have also
focused public attention on the lack of understanding of the national flood risk,
uncoordinated federal flood risk programs, diminished capabilities in flood risk
management, outdated floodplain information (flood hazard maps), and the flood
damage destruction that can occur when levees are breached or overtopped.4
The next two sections of the report provide an assessment of the U.S. risk of
flooding and why Congress might decide to evaluate the current approach to federal
flood insurance. This is followed by an analysis of lessons learned from the 1993
Midwest floods, the financial status of the program after the first catastrophic floods
in the program’s history, and the policy issues that emerged from apparent
weaknesses highlighted by the 2005 hurricanes.

1 (...continued)
property losses, and other programs to help recover from the effects of the disaster. With
respect to assistance to communities, the federal government usually provides 75%
reimbursement for disaster-related costs incurred by local and state governments. The
remaining 25% in expenses is covered by state and local entities. The intent of federal
disaster assistance is to return a damaged region to a functional state, not to pre-disaster
conditions. The disaster relief funds distributed by FEMA are from general revenue of the
U.S. government. Emergency benefits funded by the federal government are designed to
supplement, not to replace, private insurance. Thus, FEMA benefits are intended to be
coordinated with insurance coverage.
2 U.S. Department of Homeland Security, Federal Emergency Management Agency, Fact
Sheet: Hazard Mitigation Grant Program (Washington: June 2007), p. 1, available online
at [http://www.fema.gov/government/grant/hmgp/index].
3 The acquisition of property after a flood is coordinated at the state and local levels of
government. The local community usually identifies potential homes that could be acquired.
Federal Emergency Management Agency (FEMA) then provides HMGP monies to the state
and local governments to buy the property. Once the property is purchased by the city or
jurisdiction, the building is demolished and the land turned into open space in perpetuity.
The federal government pays 75% of the acquisition cost, the state 10% and the local
community 15%. States receive either 15% or 20% of the total federal disaster assistance
given to the state in HMGP funds, depending on whether the state has published an
Enhancement Mitigation Plan.
4 The centerpiece of the nation’s floodplain management system has been the National Flood
Insurance Program’s flood hazard identification and risk mapping, federally based flood
insurance, and floodplain management strategies designed to minimize future flood loss and
guide development away from flood-prone areas.

The U.S. Risk of Flooding
Historically, flooding has caused more economic loss to the nation than any
other natural hazard. Flooding in the United States has been a recurring event, and
the severity of flooding varies from year to year and from location to location.
Almost 90% of all declared disasters include a flooding component. Flooding is not
confined to just a few geographic areas.5 The Midwestern floods in June 2008 that
occurred along the upper Mississippi River and its tributaries demonstrate that flood
affects can be local, impairing a neighborhood or community, or very large, affecting
entire river basins or multiple states. Despite the billions of dollars that have been
spent for structural flood control and FEMA’s multifaceted approach to mitigating6
property losses, flood-related damages continue to rise.
The magnitude of flood events has traditionally been measured by recurrence
intervals, or the likelihood that a flood of a particular size will recur during any 10-,
50-, 100-, or 500-year period. These events have a 10-, 2-, 1-, and 0.2-percent
chance, respectively, of being equaled or exceeded during any year. (Rare floods
sometimes occur at short intervals or even within the same year.)
The sources of the nation’s rising flood risks are many. Increased urbanization
and coastal development have reportedly led to both heightened exposure of people
and property along rivers and greater chances of flood losses. The Government
Accountability Office has recently reported that weather-related events have cost the
NFIP billions in damages, and suggested that climate change may increase losses due
to increased frequency or severity of weather-related events.7 Climate scientists with
the U.S. Climate Change Science Program of the National Oceanic and Atmospheric
Administration (NOAA) predict that, due to global warming, severe precipitation
events that once occurred every 20 years in many parts of the country could happen
once every 4 to 6 years by the end of the 21st century.8

5 Roger A. Pielke, Jr., “Flood Impacts on Society,” Floods, 2000, vol. 1, p. 133-155.
6 Roger A. Pielke, Jr. and Mary W. Downton, “Precipitation and Damaging Floods: Trends
in the United States, 1932-1997,” 2000 American Meteorological Society, v. 13, p. 3625-

3637; located at:[http://sciencepolicy.colorado.edu/admin/publication_files/resource-60-th

2000.11.pdf]; and, Charles A. Perry, “Significant Floods in the United States During the 20
Century,” 2000, U.S. Geological Survey Fact Sheet 024-00, p. 4, located at
[http://ks.water.usgs.gov/Kansa s/pubs/fact-s heets/fs.024-00.html ].
7 U.S. Government Accountability Office, Climate Change: Financial Risks to Federal and
Private Insurers in Coming Decades are Potentially Significant, GAO Report GAO-07-285
(Washington: March 16, 2007), p 5.
8 See Scientific Assessment Captures Effects of a Changing Climate on Extreme Weather
Events in North America, Department of Commerce, National Oceanic and Atmospheric
Administration, June 19, 2008, located at
[http://www.noaanews.noaa.gov/ stor ies2008/20080619_climatereport.html ]
Also, see National Wildlife Federation, Heavy Rainfall and Increased Flooding Risk:
Global Warming’s Wake-Up Call for the Central United States, located at
[http://www.nwf.org/ nwfwebadmi n/binaryVault/Heavy_Rainfall_and_Increased_Flo o din

Congressional interest in flooding and flood control policy originated in the late
19th century, following massive flooding along the Mississippi River basin during the
1850s through 1870s when policymakers began to consider strategies to mitigate the
escalating costs of repairing damage to buildings and their contents caused by floods.
The federal policy response to widespread flood damages in communities and rising
taxpayer-funded disaster relief cost was initially a so-called “levee-only” policy
approach — i.e., relying on levees to protect population and property in flood-prone
areas. In 1879, Congress created the Mississippi River Commission (1879-1928) to
oversee the development of a levee system that would confine the river’s natural
flow.9 Since the enactment of the Flood Control Act of 1917, the U.S. Army Corps
of Engineers (USACE) has played a significant role in flood damage reduction.10
Over the 40-year period between the historic Mississippi Floods of 1927 and the
early 1960s, it became generally apparent that the “levee-only” flood control policy
approach was not achieving the intended objectives.11 This strategy of modifying
nature’s flood hazard areas would prove costly. Largely because of Hurricane Betsy
(1965) and other hurricanes in 1963 and 1964, as well as heavy flooding on the upper
Mississippi River basin in 1965, Congress undertook a study of the feasibility of
alternative methods of providing assistance to those suffering property losses in
floods and other natural disasters.12 The recommendations of this study and private
insurers’ unwillingness or inability to underwrite flood insurance led to the enactment
of the National Flood Insurance Act of 196813 and creation of the NFIP.
Flood damage is excluded under homeowner’s policies because insurers
consider flood risk to be an uninsurable peril. Insurers reportedly cannot accurately
estimate losses and most lack the ability to pool and spread flood risks over a large
and diverse group of (uncorrelated) insureds in order to minimize the possibility of
multiple claims for the same event. Federally backed flood insurance fills this void
and is available for residential and commercial properties in participating NFIP

9 Mississippi River Commission Act of 1879, 46th Cong., 1st sess., June 28, 1879, ch. 43, 21
Stat. 37 (codified as amended at 33 U.S.C §§ 641-653a (2000)).
10 P.L. 64-367, 39 Stat. 948.
11 John M. Barry, Rising Tide: The Great Mississippi Flood of 1927 and How it Changed
America, (New York: Simon and Schuster, 1997).
12 U.S. Senate, Committee on Banking and Currency, Insurance and Other Programs for
Financial Assistance to Flood Victims: A Report from the Secretary of the Department of
Housing and Urban Development to the President, as Required by the Southeast Hurricaneth
Disaster Relief Act of 1865 (Public Law 89-339, 89 Congress, H.R. 11539, November 8,thnd

1965), 89 Congress, 2 sess., September 1966 (Washington: GPO, 1966).

13 P.L. 90-448, 82 Stat. 573.

Is It Appropriate to Rethink
Federal Flood Insurance?
Midwestern flooding in 2008 caused dozens of levees to be breached, destroying
thousands of homes and businesses, and inundated many thousands of acres of
cropland. The flooding has once again focused public attention on the economics of
government risk-bearing (federal flood insurance) when private insurers do not offer
affordable coverage, on the exposure of federal taxpayer to losses when program
revenues do not cover costs, and on the efficacy of the nation’s floodplain
management strategy in reducing federal disaster relief expenditures.
The Midwest floods also raised several broad issues and concerns that could
lead policymakers to rethink federal flood insurance in the context of reauthorizing
the NFIP. Broadly speaking, these issues and concerns include:
!What responsibilities should property owners bear to understand and
prepare for flood hazards, especially given the confluence of greater
property exposure and a projected likelihood of more frequent severe
storms? How do we provide assistance to victims of floods? Is the
NFIP the appropriate structure for insuring flood losses? Should
Congress consider a comprehensive natural disaster program?
!Effectiveness of structural (levees and dams) and non-structural
(land-use ordinances and building codes) floodplain management
systems that annually prevent billions of dollars in flood-related
property damages, but also arguably can encourage individuals and
businesses to build in flood prone areas.
!The persistently low take-up rate of flood insurance in high-risk
areas despite federal mandatory purchase requirements (lender
compliance) for properties in a federally mapped flood zone.
!Whether households are relying on federal disaster relief for
compensation, rather than federal flood insurance that Congress
established 40 years ago to reduce such relief?
Background on the NFIP
In 1968, Congress created the NFIP in response to rising flood losses and
escalating costs to the general taxpayers for disaster relief. Federal flood insurance
was designed to provide an alternative to federal disaster relief outlays.14 The
purchase of flood insurance was considered to be an economically efficient way to
indemnify property owners for flood losses and have them internalize some of the15
risk of locating investments in the floodplains.

14 Norbert Schwartz, “FEMA and Mitigation: Ten Years After the 1993 Midwest Flood,”
Journal of Contemporary Water Resource & Education, Issue 130, March 2005, p. 36.
15 White House Floodplain Management Task Force, “Sharing the Challenge: Floodplain

The NFIP is administered by the Federal Emergency Management Agency
(FEMA) and provides subsidized and actuarially priced flood insurance policies for
individuals, businesses, and renters located within and outside designated
floodplains. The NFIP is a quid pro quo program in that FEMA agrees to make
federally backed flood insurance available only in communities that agree to adopt
and enforce floodplain management ordinances designed to reduce the future
vulnerability of the built environment. The federal government retains responsibility
for all underwriting losses, but it also has advantages over private insurers — namely,
its greater ability to avoid adverse selection and moral hazard through mandatory
purchase requirements (compulsory membership) and its access to greater
information (risk assessment and flood hazard mapping).
Recognizing the low market penetration of flood insurance in the early 1970s,
Congress enacted the Flood Disaster Protection Act of 197316 to establish a
mandatory flood insurance purchase requirement for structures located in identified
special flood hazard areas (SFHA).17 The idea was to shift more of the cost of floods
to those who build in flood-prone areas. After the 1993 Midwest floods, it became
apparent that homeowners were still not adequately complying with the mandatory
purchase requirement. The National Flood Insurance Reform Act of 1994 was
enacted to strengthen the purchase requirement.18 In 2004, Congress enacted the
Flood Insurance Reform Act of 2004 to address, among other things, the repetitive
loss property (RLP) problem.19
Challenges Facing the NFIP
In the wake of the 2005 hurricanes and the 2008 Midwest floods, critics of the
status quo have pointed to several recurring problems that they believe affect the
NFIP. They include:20
!The lack of accounting by the NFIP for residual risk behind levees
has contributed property owners dismissing their exposure to risk of
levee failure and overtopping. The 1993, 2005, and 2008 events
illustrate how ignoring residual risk could contribute to greater
demand for disaster relief.

15 (...continued)
Management Into the 21st Century: Report of the Interagency Floodplain Management
Review Committee to the Administration Floodplain Management Task Force,” June 1994,
located at [http://www.floods.org/PDF/Sharing_the_Challenge.pdf], p. 131.
16 P.L. 93-234; 87 Stat. 975.
17 P.L. 93-234; 87 Stat. 975.
18 P.L. 103-325; 108 Stat. 2255.
19 P.L. 108-264; 118 Stat. 712.
20 For a more detailed list of challenges facing the NFIP, see, U.S. General Accounting
Office, Challenges Facing the National Flood Insurance Program, GAO Report GAO-03-

606T (Washington: April 1, 2003).

!Inaccurate flood maps that need updating to reflect not only recent
development in flood-prone areas but residual flood risk behind
levees, dams and other structural flood control systems.
!Providing disaster relief to uninsured individuals tends to discourage
steps to reduce loss exposure and results in higher societal and
federal costs.
!The low flood insurance market penetration in river flood-prone
areas that results in billions of dollars in uninsured losses.
!Substantial cross-subsidies among classes of policyholders with the
use of “historical average loss year” premium setting approach.
!The performance of FEMA floodplain management standards in
achieving flood damage reduction.
!The desirability of establishing a catastrophe reserve fund to pay
claims during the rare catastrophic loss year. A reserve fund would
mean higher premium rates.
Midwest Floods of 2008
Early rough estimates of flood damages from the 2008 Midwest floods indicated
that the cost to the NFIP would likely be small because of the relatively low number
of policies and claims filed in Midwestern states. Most experts appear to agree the
program will be able to cover 2008 flood claims without having to borrow from the
Department of the Treasury. The NFIP might still have to borrow to pay scheduled
interest payments on the debt, however.
Table 1 shows the number of federal flood insurance policies and the number
of total claims submitted in 12 Midwestern states, as a result of the March and June
2008 floods. The table also shows total claims filed and total payments over the 20
year period from 1988 to 2007. NFIP had reportedly received only about 6,338
insurance claims, as of June 30, 2008. Iowa has experienced the majority of damages
based on the number of counties affected (83 of 99 counties), policies in force,
coverage in force, severity of damage to residential and commercial structures,
characteristics of the flooding, and the estimated or average amount of the claim
Table 2 provides a list of the top fifteen significant flood events in the United
States in terms of NFIP payouts. The 2008 Midwest flood does not rank among
these. Although the 1993 Midwest flood was the most devastating in the region, with
total economic damages approximately $20 billion, it ranks only 12th in terms of the
NFIP, with only $273 million in NFIP claims. In contrast, the devastating flooding
caused by Hurricanes Katrina, Rita and Wilma resulted in more than $200 billion in
economic losses of which $21.9 billion were covered under the NFIP.

The key lesson from the 2008 Midwest floods is not the magnitude of payouts
under the NFIP but, rather, the eventual cost of federal disaster relief for individual,
business and communities. Congress might therefore opt to reassess federal flood
insurance that was intended to work in tandem with risk identification /mapping and
floodplain management regulation to reduce flood losses.
Table 1. Federal Flood Insurance Policies Issued and Claims
Paid to Midwestern States: 1988-2007 and June 2008
NFIP Policies Issued andTotal Claims Payments: 1988-2007
Claims Reported(Constant Dollars, As of 1/31/08)
Cl ai m sa
# of PoliciesReportedTotalTotal
State(As of4/30/08)(As of 6/30/08)ClaimsPaymentsRank
Illinois 48,404 691 11,422 $151,794,472 3
Indiana 29,091 1,418 5,577 72,696,096 6
Iowa 10,930 2,584 4,382 62,762,314 7
Kansas 11,995 0 2 ,916 60,050,079 8
Michigan 25,838 23 1,496 17,636,680 10
Minneso ta 8,624 0 5 ,378 94,988,744 5
Misso uri 24,223 364 15,560 327,648,567 1
Nebraska 11,821 0 1 ,102 12,239,363 12
North Dakota4,43105,482124,358,1714
Ohio 40,745 3 10,330 192,508,059 2
South Dakota3,13001,12315,160,05611
Wisconsin 13,958 1,281 2,615 29,507,952 9
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.
a. Includes claims filed March-June 2008. In addition to these 12 Midwestern states, three states
experienced flood losses in March that resulted in NFIP claims: Arkansas (439), Kentucky (195), and
Texas (106).

Table 2. Top Fifteen Significant Flood Events Covered in the
National Flood Insurance Program
(1978- April 30, 2008)
of PaidAmount PaidAverage
RankEventDateLosses($ Constant)Paid Loss
1Hurricane KatrinaAug. 2005164,917$15,920,395,412$95,077
2Hurricane IvanSep. 200427,3041,566,138,61255,518
3Tropical Storm AllisonJun. 200130,6271,103,696,09135,944
4Louisiana FloodMay 199531,343585,067,88618,667
5Hurricane IsabelSep. 200319,685490,643,15424,076
6Hurricane FloydSep. 199920,438462,270,25322,614
7Hurricane RitaSep. 2005 9,328458,251,68747,428
8Hurricane OpalOct. 199510,343405,528,54339,208
9Hurricane HugoSep. 198912,843376,494,56629,315
10Hurricane WilmaOct. 20059,530361,259,89537,340
11Nor’easterDec. 199225,141346,151,23113,768
12Midwest FloodJun. 199310,472272,827,07026,053
13PA, NJ, NY FloodsJun. 20066,386224,237,06135,114
14Nor’EasterApr. 20078,603222,735,52925,890
15March StormsMar. 19939,841212,616,75121,605
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.

Table 3 illustrates that none of the 12 Midwestern states made the list of the
top 10 states ranked by flood insurance claims payments made under the NFIP
over the 20 year period from 1988 to 2007.
Tables 2 and 3 indicate that hurricanes — not river flooding — have been
the major natural hazard contributing to NFIP claims payments and the most
significant flood events.
Table 3. Ten States with the Highest Federal Flood Insurance
Claims Payments: 1988-2007
Number of Policies
IssuedTotal Payments
State(As of 4/30/08)Total Claims(Nominal $)
Lo uisiana 501,555 241,807 $14,985,570,820
Florid a 2 ,184,568 122,340 3,311,749,199
Mississippi 78,163 31,738 2,680,787,295
T exas 670,050 91,197 2,423,449,920
Alabama 54,763 21,477 837,190,270
North Carolina134,50941,310736,848,516
New Jersey226,84345,838730,629,078
Pennsylvania 67,311 31,369 673,297,134
New York148,46229,993482,461,366
South Carolina198,96315,478416,677,961
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.
Lessons Learned from Previous Floods
Several flood insurance, risk assessment/mapping and floodplain management
regulatory issues were illustrated by the Midwestern floods of 1993 and 2008, and
the 2005 hurricanes.
The 1993 Midwest Floods
After the 1993 Midwest floods, the Clinton Administration commissioned a
White House study, led by Army Brigadier General Gerald E. Galloway, to determine
what could be done to reduce future flood damage. Central to the findings was the
labeling of the flood protection system in the upper Mississippi Basin as:
... a loose aggregation of federal, local, and individual levees and reservoirs ...
[that] does not ensure the desired reduction in the vulnerability of floodplain
activities to damages.21

21 White House Floodplain Management Task Force, Sharing the Challenge: Floodplain
Management Into the 21st Century: Report of the Interagency Floodplain Management

The “Galloway Report” concluded that the 1993 flood was a significant but not
unprecedented rainfall-river event, and that such floods would probably occur again.
Further, the study noted that although the goals of floodplain management are clear
and the means to carry it out existed, improvement and refocusing were needed.22
The responsibilities for flood management are largely within state and local
governments. Some 15 years later, the nation’s levee system remains as an
uncoordinated assortment of levees that are owned and maintained by local
governments, agencies, and even individuals. Some disaster experts have called for
a more uniform approach to managing the levees.
The 2005 Hurricanes
An important lesson learned from the 2005 hurricanes is the importance of
identifying levees and assessing the level of protection they offer citizens. Following
the floodwall failures in New Orleans and levee overtopping in many parts of coastal
Louisiana in 2005, President Bush signed into law the Emergency Supplemental
Appropriations Act of 2006 for Defense, the Global War on Terror, and Hurricane
Recovery, that included $30 million to develop and implement a national levee
inventory and assessment program.23 In June 2006, the USACE completed the initial
inventory survey of federal levees and created a national database that includes the
location, number, and condition of these levees.24 The next step is to include state,
local or privately-owned levees in this inventory to improve understanding of the role
of levees as a component of the national flood risk.
The 2008 Midwest Floods
The first lesson that can be learned (or relearned) from the 2008 Midwest flood
is that the NFIP might not completely internalize the risk of living and investing in
the floodplain nor achieve the level of individual participation or reconstruction of
older homes originally envisioned. Critics of the NFIP say the program along with
levees encourage too many people to locate in areas susceptible to flood damage, and
flood victims reliance on federal disaster assistance for uninsured losses. These
tendencies, in many ways, negate the original intent of the NFIP, which was to
minimize future flood damages and the corresponding need for federal disaster relief.
Second, many property owners affected by the 2008 Midwest floods might have
made location and insurance decisions based on inaccurate or incomplete flood maps.
This lesson was also learned in the aftermath of Hurricane Katrina. FEMA has
consistently sought to communicate to the public the fact that levees do not eliminate
the risk of inundation. The residual flood risk generally has not been priced into

21 (...continued)
Review Committee to the Administration Floodplain Management Task Force, June 1994,
located at [http://www.floods.org/PDF/Sharing_the_Challenge.pdf], p. 131.
22 Ibid.
23 P.L. 109-234, 120 Stat. 455.
24 See, U.S. Army Corps of Engineers, Fact Sheet: National Levee Safety Program, located
at [http://www.hq.usace.army.mil/cepa/releases/leveesafetyfactsheet.pdf].

federal flood insurance policies, funds have not been set aside for catastrophe losses,
nor do the premium rates reflect the affect of coastal erosion and climate change on
flood risks. These factors were not contemplated or built into the program at
inception. Moreover, the NFIP is providing subsidized flood insurance to
homeowners who choose not to take advantage of this financial protection. A Rand
Corporation study of the NFIP’s mandatory purchase requirement nationwide
indicated that only about 49% of single family homes in SFHA are covered by flood
i n surance. 25
Based on the certification of levees as providing at least protection from the
100-year flood, property owners may not purchase flood insurance, yet they may face
significant uninsured losses if the levee fails or is overwhelmed. Many homeowners
were told or wrongly concluded they were not at risk because they resided behind a
certified levee and, therefore, were outside the federal requirement to purchase flood
An illustration of the national consequences of not pricing or reserving for
residual risk (due to infrastructure failure) might be helpful. The most costly flood
in the 40-year history of the NFIP were caused not by rainfall-river flooding but by
breeched or overtopped levees protecting the City of New Orleans from coastal storm
surges. According to FEMA, some 75-80% of the area behind the levees were
designated SFHA (high risk zone) due to rainfall. There was an explicit flood
insurance purchase requirement in effect in the affected areas. Still, the NFIP
assumed the levees were going to hold back storm surge floods and therefore did not
price the policies to reflect the failure or overtopping of levees. The lack of
understanding of the national flood risk, the inadequate communication of that risk,
and diminished capabilities in flood risk management due to inaccurate or out-of-date
flood hazard maps are weaknesses in the program.
Third, the price charged for federal flood insurance could understate the risk
because flood hazard data might not be accurately reflected on flood maps and in the
underwriting process. In practical terms, the 2008 Midwest floods have exposed the
public safety risks associated with levee systems and an over-reliance on levees and
other structural flood control measures designed to mitigate future flood losses across
the nation. Given the vulnerability of the large number of levees that are not
adequately inspected and maintained, there is an increased risk that the NFIP will
continue to experience unexpected losses and fiscal deficits, potentially requiring
future NFIP borrowing from the U.S. Treasury.
The high degree of uninsured flood losses during the 2008 floods could raise the
policy question of who should appropriately bear the cost of the decision to live in
potentially high-risk areas, including areas behind levees, dams and other flood
control structures. In the absence of flood insurance, the cost of repairing the flood
damage will be borne either by the property owner from their own financial resources
or through federal disaster assistance — not flood insurance payments.

25 Rand Institute for Civil Justice, The National Flood Insurance Program’s Market
Penetration Rate: Estimates and Policy Implications
[ h t t p : / / www.r a nd.or g/ pubs/ t echni cal _r epor t s / 2006/ RAND_T R300.pdf ]

Financial Status of NFIP
The NFIP experienced only one catastrophic loss year in its 40 year history,
impairing the program’s ability to pay current obligations, administrative expenses,
as well as interest on the debt to the Treasury. Table 4 shows the NFIP has a current
fiscal deficit of $17.4 billion as a result of claims from Hurricanes Katrina and Rita
and having to borrow from the Treasury. The 2005 hurricane-related flood claims
exceeded the cumulative claims payments since the program’s inception.
In an attempt to both protect the NFIP’s integrity after the 2005 hurricanes
and ensure FEMA has the financial resources to cover its existing commitments,
Congress passed, and the President signed into law, legislation to increase the NFIP’s
borrowing authority to allow the agency to continue to pay flood insurance claims:
first to $3.5 billion on September 20, 2005;26 to $18.5 billion on November 21,
2005;27 and finally to $20.8 billion on March 23, 2006.28 FEMA paid $176 million
in interest to the Treasury in 2006, $718 million in 2007, and expects to pay $734
million in 2008.
The 2005 floods exposed significant vulnerability in the administration and
oversight of the program. It is unlikely that the $17.4 billion treasury debt will be
repaid within the next 10 years given annual interest payments of about $1 billion
and annual premium income of approximately $2.3 billion.29 Experts agree that even
if FEMA increased flood insurance rates up to the maximum amount allowed by law
(10% per year), the program would still not have sufficient funds to cover future
obligations for policyholder claims, operating expenses, and interest on debt
stemming from the 2005 hurricane season.30
By law, the NFIP does not operate under the traditional definition of
insurance solvency; rather, the program operates under a congressional mandate of
annual limits on premium increases, premium discounts (subsidies) for certain
structures in flood-prone areas, and actuarial premium on other structures. Also,
unlike private insurers, the NFIP rates are set at levels that make the program self-
supporting for the historic average loss year. The program does not generate
sufficient premium income to cover flood insurance claims and expenses and build
a reserve fund for future catastrophic loss years.

26 P.L. 109-65; 119 Stat. 1998.
27 P.L. 109-106; 119 Stat. 2288.
28 P.L. 109-208; 120 Stat. 317.
29 See Letter from Donald B. Maroon, Acting Director of Congressional Budget Office, to
Honorable Judd Gregg, Chairman, Committee on the Budget, March 31, 2006, located at
[ h t t p : / / www.cbo.gov/ f t pdocs/ 72xx/ doc7233/ 05-31-NFIPLet t e r Gr e gg.pdf ] .
30 Ibid.

Table 4. History of U.S. Treasury Borrowing Under the National
Flood Insurance Program
(As of July 31, 2008, $ Constant)
Fiscal yearAmount borrowedAmount repaidCumulative debt
Prior to FY1981a$ 917,406,008$ 0$ 917,406,088
1981 164,614,526 624,970,099 457,050,435
1982 13,915,000 470,965,435 0
1983 50,000,000 0 50,000,000
1984 b 200,000,000 36,879,123 213,120,877
1985 0 213,120,877 0
1994 c 100,000,000 100,000,000 0
1995 265,000,000 0 265,000,000
1996 423,600,000 62,000,000 626,600,000
1997 530,000,000 239,600,000 917,000,000
1998 0 395,000,000 522,000,000
1999 400,000,000 381,000,000 541,000,000
2000 345,000,000 541,000,000 345,000,000
2001 600,000,000 345,000,000 600,000,000
2002 50,000,000 650,000,000 0
2005 d 300,000,000 75,000,0000 225,000,000
2006 16,660,000,000 0 16,885,000,000
2007 650,000,000 0 17,535,000,000
2008 to date50,000,000225,000,00017,360,000,000
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency’s Office
of Legislative Affairs.
Note: Borrowings through 1985 were repaid from congressional appropriations. Borrowings since
1994 have been repaid from premium and other income.
a. Balance forward from U.S. Department of Housing and Urban Development.
b. Figure for the $213.1 million in cumulative debt in 1984 were provided by FEMA. It reflects
additional cost outside of the insurance program.
c. Of the $100 million borrowed, only $11 million was needed to cover obligations.
d. The NFIP borrowed $300 million in 2005 to pay claims from the 2004 hurricane season. Note:
Hurricanes Katrina, Rita and Wilma struck in the fall of 2005, after the 2006 fiscal year began.

Policy Issues
Recognizing the unprecedented financial and regulatory challenges facing the
NFIP, some insurance market analysts and policymakers would maintain that the
program’s purpose and framework of “carrots and sticks” be re-examined. Changes
could occur in several areas: long-term financial solvency, premium structure reform,
mandatory purchase requirements, risk assessment and flood hazard mapping,
accounting for “write-your-own” companies, and multi-peril coverage.
Long-Term Financial Solvency
A key policy issue for Congress is whether the NFIP should be self-sustaining
and how best to pay claims in years with catastrophic losses. According to disaster
experts, options for improving the NFIP’s financial solvency might include steps to:
!Dramatically reduce the financial cost of multiple flood insurance
payments (i.e., repetitive loss properties) that account for a
disproportionate share of the NFIP’s total claims payouts. This
would require eliminating the premium subsidies available to
repetitive loss properties.
!Strengthen floodplain management regulations designed to restrict
development in high risk areas and require new construction to be
elevated three feet above the base flood elevation (BFE).
!Improve flood risk assessment and mapping of the nation’s
floodplains and include 500-year floodplains and areas behind
!Strengthen and enforce mandatory purchase requirements.
!Forgive the full debt owed by the NFIP to the Treasury.
!Require actuarially-based premiums in the NFIP.
There is no consensus on any of these options. Some aspects of all of them,
however, are now being considered in bills — H.R. 3121 and S. 2284 — pending in
the 110th Congress.31
Premium Subsidies. Federally subsidized flood insurance is offered to
encourage participation in the NFIP by communities and the purchase of flood
insurance by individuals. Subsidized flood insurance premiums are possible because
the government is positioned through loans to the NFIP and otherwise, to spread
losses over time in the event of catastrophic flood losses. Owners of properties built
prior to the issuance of a community’s flood hazard map typically pay rates that are

31 H.R. 3121, Flood Insurance Reform and Modernization Act of 2007, was introduced by
Rep. Waters. S. 2284, with the same title as H.R. 3121, was introduced by Sen. Dodd. See
CRS Report RL34367, Side-by-Side Comparison of Flood Insurance Reform Legislation inth
the 110 Congress, by Rawle O. King.

less than full actuarial rates and are exempted from the NFIP’s floodplain
management standards. The NFIP, however, requires all new and substantially
improved buildings to be constructed to or above the elevation of the 1%-annual-
chance flood. Buildings constructed after December 31, 1974 or after the publication
of a flood insurance rate map (FIRM) are charged an actuarial premium that reflects
the property’s risk of flooding.
Premium subsidies were considered necessary because occupants often did
not understand the flood risk when they built in these areas (flood maps were not
available); there were no public safeguards prohibiting the occupancy of this land;
and subsidies of pre-FIRM structures could provide an incentive to local
communities to participate in the program and discourage unwise future floodplains
construction.32 NFIP’s premium subsidies were intended to be phased out over time,
as the number of pre-FIRM properties (and accompanying subsidies) would gradually
diminish as they were damaged and rebuilt/relocated under stronger floodplain
management and building codes.
Congress is considering legislative initiatives (H.R. 3121 and S. 2284) that
would: (1) eliminate premium subsidies for non-primary residences, commercial
properties and repetitive loss properties; (2) increase the allowable annual rate
increase in NFIP policies; and (3) create new strata of flood insurance rates to
accurately reflect the variations in risk within individual zones.
Solvency and Actuarial Soundness. Congress did not set up the NFIP
on an actuarially sound basis when it authorized subsidized rates for pre-FIRM
structures without providing annual appropriations to fund the subsidy. In order to
make up the subsidized premium shortfall, FEMA established a rating methodology
that consisted of a requirement to earn a target level of premium income for the
program as a whole that is at least sufficient to cover administrative expenses and
losses relative to what FEMA calls the “historical average loss year.” The premium
level generated to cover the historical average loss year must accommodate the
combined effect of the portion of NFIP business paying less than full risk premiums
and the portion of the business paying full risk premiums.
Several additional options might be considered to strengthen the financial
solvency and actuarial soundness of the NFIP: address the repetitive loss properties
(RLPs) problem, create a catastrophe reserve fund for catastrophic loss years, create
incentives for private sector participation, and forgive the debt.
Repetitive Flood Loss Properties. Approximately 1% of insured
properties, so-called repetitive loss properties, are responsible for approximately 30%
of all program claim costs.33 Efforts are underway to phase out premium subsidies
on RLPs through voluntary buyouts or the imposition of full actuarially based rates
for RLP owners who refuse to accept FEMA’s offer to purchase or mitigate the effect

32 PriceWaterhouseCoopers, Study of the Economic Effects of Charging Actuarially Based
Premium Rates for Pre-FIRM Structures, Washington, May 14, 1999, p. 1-2.
33 U.S. Government Accountability Office, National Flood Insurance Program: Actions to
Address Repetitive Loss Properties, GAO Report GAO — 04-401T (Washington: March 25,

2004), p. 6.

of flood damage. FEMA’s Pilot Severe Repetitive Loss Program (SRLP) calls for
voluntary buyouts of SRLP and conversion of the land in perpetuity to open space
Encourage Private Sector Participation. One option to address the
NFIP’s long-term solvency is to undertake efforts to shift flood insurance back to the
private insurance markets and open the federal program to competitive bid
contractors under the Write-Your-Own program.34 It might be possible to plan for
a higher degree of private sector involvement by requiring private insurers to “make
available” private flood insurance policies at actuarially determined prices in flood-
prone areas with the federal government providing federal reinsurance that would be
self-supporting in the long run. Some economists have suggested that floods and
other catastrophic risks may now be insurable because of insurer’s ability to transfer
risk to the capital markets through securitization, and assess catastrophe modeling35
and other analytical techniques that permit more accurate pricing of policies.
FEMA has a responsibility to examine the NFIP’s contingent liabilities and
recommend ways to provide financial stability to the federal flood insurance
program. This activity is performed in conjunction with the program’s annual rate-
setting process. In 2000, FEMA undertook a study with the assistance of accounting
firm Deloitte & Touche to explore alternative financing arrangements to reduce the
need for U.S. Treasury borrowing. FEMA was concerned about the NFIP’s erratic
cash flow and the potential for catastrophic losses within a short period of time. The
option that received the most attention was to create a special financial reinsurance36
vehicle to finance catastrophic loss years. After review by the Office of
Management and Budget (OMB), this option was not adopted because it was
determined that the cost to borrow from the U.S. Treasury was cheaper. A similar
option has been suggested to require private insurers to sell flood insurance coverage
with a federal reinsurance backstop.
Mandatory Purchase Requirements. Federal flood insurance is
mandated for all structures with federally backed loans or mortgages located in
SFHA identified in FEMA flood insurance rate maps. To increase the level of total
NFIP insurance coverage, some experts have suggested: (1) updating the floodplain
maps, especially of areas protected by levees of questionable reliability; (2)
increasing the awareness of flood risk, especially where there is a substantial residual
risk of catastrophic flooding; (3) requiring mandatory flood insurance in areas where
there is a substantial risk of flood; (4) requiring escrow of flood insurance premiums;
and (5) requiring additional property owners in residual risk areas to purchase flood
insurance, particularly those in the 500-year floodplain behind levees or dams.

34 The idea is to outsource the marketing, underwriting, and policy administration of the
NFIP through a single or a few private insurers under a contractual arrangement. Currently,
any insurer wishing to participate in the NFIP’s Write-Your-Own program can do so.
35 Dwight M. Jaffee and Thomas Russell, “Can Securities Markets Save the Private
Catastrophe Insurance Market?” paper delivered at eh Asian-Pacific Risk and Insurance
Association Conference, July 19, 1998, p. 11.
36 Federal Emergency Management Agency, National Flood Insurance Program: Discussion
of Financial Stabilization Possibilities, FEMA Unpublished Internal Document, November

20, 2000.

Debt Forgiveness. The total expected cost to the Treasury to forgive the
NFIP’s debt was $17.4 billion, as of May 1, 2008. This amount includes $50 million
borrowed in early April to meet semi-annual interest payments. The NFIP’s
outstanding borrowing is the combined result of paying insurance claims and
servicing the debt on the borrowing.
Risk Assessment and Flood Hazard Maps. Risk assessment and
floodplain mapping are important components of the NFIP’s ability to allocate the
cost of the program across all policyholders. Flood maps show specific flood zones
that correspond to the level of risk and premium rates. In addition to establishing
flood insurance rates, flood maps are used to: (1) establish minimum elevation levels
for new construction and guide development in floodplains; (2) determine whether
a property is located in a SFHA, and, therefore, whether the owner is required to
purchase flood insurance in order to secure a federally regulated or insured mortgage;
(3) facilitate lender enforcement of mandatory flood insurance purchase
requirements; and (4) provide risk information for underwriting and rating
applications for flood insurance under the NFIP.
The 2008 Midwest floods has once again raised awareness concerning the
accuracy of FEMA’s flood hazard maps. A threefold set of problems was revealed.
First, the actual insurance cost of living in a floodplain has not been reflected in the
cost of ownership. The government generally finds it difficult to assess risk because
of political pressure not to differentiate one person or firm from another in the way
the private sector would. This difficulty might lead to large and hidden cross-
subsidies. Moreover, governments are susceptible to pressures not to enforce certain
regulations, particularly after a catastrophic flood event. Second, according to
FEMA, approximately 25% of all flood claims have been on properties located
outside of currently designated 100-year floodplains. Inaccurate flood maps typically
result in unexpected flood damages, uninsured properties and larger than expected
federal emergency disaster assistance expenditures. Third, many people continue to
underestimate their vulnerability to floods.
Flood Map Modernization. FEMA is currently engaged in a multi-year
nationwide Flood Insurance Study (FIS) to revise and update previous FIS/FIRMs
into more reliable easy-to-use digital flood insurance rate maps (DFIRMs). FEMA
intends to consolidate separately published FIS and FIRMs into one seamless
continual FIS report and FIRM that depicts flood hazards nationally. The DFIRMs
call for updating FIRMS to a GIS database format that allows ease of modification,
electronic access and transmission, and the ability to incorporate more detailed
topographic information and use of information across various platforms.
Advisory Flood Recovery Maps. Following the 2005 hurricane season,
FEMA issued new advisory base flood elevations (ABFE) for new construction and
the rebuilding of structures that were more than 50% destroyed by Hurricanes Katrina
and Rita. FEMA indicates that if communities are to be rebuilt after a major flooding
event, such as the 2005 hurricanes or the 2008 Midwest flooding, they must be
elevated at or above the 1% annual chance flood elevation. According to FEMA,
structures built to this standard, as a class, sustain 70% less damage than older
buildings. In the case of New Orleans and the surrounding communities, the ABFE
requires new construction to be three feet higher than base flood elevation (BFE) for

the community’s old FIRMs. Some areas that previously were not in a SFHA are
now delineated as flood zones. Homeowners in these newly-designated SFHAs
would be obligated under federal law to purchase flood insurance.
Residual Risks Behind Levees. The importance of levees in flood risk
reduction received much public attention after the levees that protected New Orleans
breached and caused massive flooding. In the process of FEMA’s development of
a countrywide DFIRM, the agency, in coordination with the USACE, must certify
levees as providing protection to the 1% annual chance flood elevation. FEMA must
have documentation (e.g., maintenance records and engineering reports) from the
levee owner that stipulates the levee meets certain standards before it could be shown
on a DFIRM as protecting against the 1% annual chance flood. If levees are not
certified, FEMA could designate the area behind the levee to be a SFHA which
would effectively require homeowners in these areas to purchase flood insurance.
On September 25, 2006, FEMA issued Revised Procedure Memorandum No.
43 — Guidelines for Identifying Provisional Accredited Levees to give updated
guidance to community officials or other parties seeking accreditation of a levee and37
the required data and documents to accomplish this task. The memorandum
established procedures for provisionally certifying levees in preparation for DFIRMS
and the FEMA’s map modernization program (MapMod).
FEMA’s provisional accredited levee (PAL) procedures were designed to
give levee owners more time to gather necessary data and documents needed to prove
a levee should be certified. Once FEMA issues an agreement letter that outlines the
deficiencies that the levee owner must resolve in order to receive FEMA’s levee
certification, the community has 90 days to sign and 24 months after signing to
submit final documentation. FEMA requires a professional engineer to certify and
seal the levee certification. During the 24 month period, the area protected by the
levee will be mapped as a shaded zone X (zone outside the Special Flood Hazard
The intent is to regulate flood risk behind levees. The problem is that,
although the USACE had successfully inventoried some levees, identified
deficiencies in some levees, and communicated information to some levee owners
and FEMA, thousands more state, local government, and privately-owned levees
have not been similarly identified, evaluated and inventoried. Therefore, FEMA is
presumably not prepared for new DFIRM issuance in the MapMod program.
Accountability for Write-Your-Own Companies
Another issue facing the NFIP is the uncertainty about claims adjustment
practices when a single event causes both flood damages (NFIP insured) and wind
damages (privately insured). As some observed after the 2005 hurricanes, WYO
(private) insurers might have an inherent conflict of interest in adjusting NFIP

37 See, U.S. Department of Homeland Security, Federal Emergency Management Agency,
Revised Procedure Memorandum No. 43 — Guidelines for Identifying Provisional
Accredited Levees, located at [http://www.fema.gov/library/viewRecord.do?id=2511].

insurance claims and determining whether a loss was attributable to wind (privately
covered) or flooding (insured under the NFIP).
The issue in contention is whether FEMA has adequate procedures and
collects accurate information on damages to ensure claims paid by the NFIP cover
only those damages caused by flooding. Insurers typically adjust flood claims along
with their own, creating this internal conflict of interest.38 To address this issue,
Congress is considering whether to: (1) prohibit WYO insurers from including anti-
concurrent causation language in their homeowners’ policies;39 (2) establish a Flood
Insurance Advocate Office to strengthen the oversight of the WYO program; (3)
require FEMA to review and conduct rulemaking on WYO insurer reimbursements
so that reimbursements and actual administrative expenses are aligned; and (4) fully
implement the 2004 Flood Insurance Reform Act, which some analysts believe
would improve communications and assure the proper education and training
standards for insurance agents.
Multiple-Peril Coverage for Wind and Flood Damages
As noted earlier, Congress is considering legislation — H.R. 3121 — that
would create a combined federal insurance program with coverage for both wind and
flood damage. Proponents of adding the wind peril say it is necessary to eliminate
coverage disputes when wind and flood both contribute to a loss. Optional wind
coverage is also said to be needed because of the difficulty that property owners have
in obtaining affordable wind coverage in states along the Gulf and Atlantic coasts.
Private insurers have dramatically increased premiums and deductibles, reduced
coverage or withdrawn altogether from these areas out of concern about catastrophic
risk exposure. In those areas, homeowners must instead purchase their wind
coverage from state pools, where the premiums can be prohibitively expensive.
Opponents of adding optional wind coverage to the NFIP believe that there
is adequate wind coverage capacity in every state through either the traditional
private market or state-sponsored wind pools. They express concern over the NFIP’s
ability to properly price an all-perils policy and avoid wide-scale financial deficits in
the program following a natural catastrophe.
In addition, the Government Accountability Office (GAO) has cited several
concerns about expanding the NFIP to offer wind coverage. They involve: (1) wind
hazard prevention standards that communities would have to adopt in order to receive
coverage; (2) uncertainty about the adoption of programs to accommodate wind

38 U.S. Government Accountability Office, National Flood Insurance Program: Greater
Transparency and Oversight of Wind and Flood Damage Determinations are Needed, GAO
Report GAO-08-28 (Washington: December 28. 2007), p. 21.
39 Concurrent causation holds that if two causes (e.g., water and wind) combine to produce
a loss or damage, and one of the two causes is excluded, the loss will be covered absent
policy wording to the contrary. The “anti-concurrent causation” doctrine was designed to
prevent the theory of “concurrent causation” from broadening coverage under standard
property insurance policies.

coverage; (3) establishing a new rate-setting process; (4) enforcement of new
building codes; and (5) administration and oversight of the program.40
Rather than adding an optional wind coverage to the NFIP, the Senate version
of H.R. 3121 (S. 2284) takes a different approach to the insurance availability and
conflict of interest concerns. S. 2284 would create a bipartisan Commission on
National Catastrophe Risk Management and Insurance to study the issue and a
National Flood Insurance Advocate, and authorize FEMA to obtain information from
WYO insurers about their handling of wind/flood claims.
Legislative Response
In response to the 2008 Midwest floods, Congress has enacted emergency
supplemental appropriations legislation to compensate flood victims and is now
considering legislative measures — H.R. 3121 and S. 2284 — that would reauthorize
and reform the NFIP. On June 30, 2008, President Bush signed into law Public Law
110-252 to, among other things, appropriate $8.48 billion for natural disaster relief
and recovery, including $5.64 billion for construction of flood prevention and
protection structures in Louisiana and $2.84 billion for flood assistance in
Midwestern states. On September 27, 2007, the House passed the Flood Insurance
Reform and Modernization Act of 2007, H.R. 3121. On May 13, 2008, the full
Senate approved S. 2284, another flood insurance reform bill. The House and Senate
have so far not convened a conference committee to reconcile the differences
between H.R. 3121 and S. 2284.
Specifically, both H.R. 3121 and S. 2284 would: (1) allow the NFIP to
increase premiums by 15% per year, up from 10%; (2) phase out the premium
subsidies for second homes, commercial properties, and repetitive-loss properties;
(3) increase market penetration by expanding the properties subject to the mandatory
flood insurance purchase requirement after areas behind levees are remapped; (4)
increase penalties for a lender’s non-compliance; and (5) enhance communication to
individuals and insurance agents about flood risk.41
The bills have some fundamental differences. H.R. 3121 would expand the
program to cover damage caused by wind; S. 2284 lacks this provision. S. 2284, but
not H.R. 3121, would forgive $17.5 billion debt to the Treasury that the program
incurred after the 2005 hurricane season. S. 2284 would create a new Office of Flood
Advocate to provide oversight of WYO insurers, as well as a new bipartisan
Commission on Natural Catastrophe Risk management and Insurance to study and
report to Congress on ways to address the availability of catastrophe insurance
coverage in high-risk areas.

40 U.S. Government Accountability Office, Natural Catastrophe Insurance: Analysis of a
Proposed Combined Federal Flood and Wind Insurance Program, GAO Report GAO-08-

504 (Washington: April 25, 2008), p. 2.

41 CRS Report RL34367, Side-by-Side Comparison of Flood Insurance Reform Legislation
in the 110th Congress, by Rawle O. King.