Who Pays For Flood Insurance?

An InternetU.org Case Study

If people want to live in floodplains, he said, "let them do it at their risk, not the public's risk."

Posted on Mon, Sep. 25, 2006
Bailing and Sinking
By Anthony R. Wood
Inquirer Staff Writer

One block off the Delaware River in flood-prone Yardley, which has 114 properties on FEMA’s repetitive-loss list, Wendy and Brad Jarney are getting a federal subsidy to raise their home.

One block off the Delaware River in flood-prone Yardley, which has 114 properties on FEMA’s repetitive-loss list, Wendy and Brad Jarney are getting a federal subsidy to raise their home.


Second of three parts.

One of the world's largest insurers is $20 billion in debt. It has no hope of repaying its loans anytime soon, if ever.

Worse, the $870 billion worth of homes and businesses it covers are among the highest-risk properties in the country, with claims filed on many of them again and again.

Such troubles would constitute a historic corporate collapse were not the insurer the National Flood Insurance Program, owned and operated by the U.S. government, and the lenders the U.S. taxpayers.

"The NFIP would be bankrupt if it were a private insurance company," said J. David Cummins, an NFIP expert and professor of insurance and risk management at the University of Pennsylvania's Wharton School.

In all the devastation of the 2005 hurricane season, one of the lesser-noticed victims was the NFIP - a program run by the beleaguered Federal Emergency Management Agency and informed by a collection of mostly antiquated floodplain maps that a former director has called "a disgrace."

Of its nearly five million policyholders in flood-prone communities nationwide, 62,100 live in Pennsylvania and 207,200 in New Jersey, representing $50 billion in imperiled property.

As it does every few years, Congress will begin to discuss next fall whether to reauthorize the program it established in 1968. According to FEMA spokesman Frank Ferreira, agency officials expect that Congress "will continue to support" its creation through the worst crisis in the program's existence.

The Government Accountability Office has added the NFIP to its "high risk" list of drains on the U.S. Treasury, saying it is "highly unlikely" that the program will ever make good on its loans.

Congress is considering legislation to pull the NFIP out of hot water. Several bills would change the way it does business. Several others would forgive its debt. Should the program be allowed to stiff the Treasury, the cost would amount to about $200 from every U.S. household.

Yet even if its IOUs disappear tomorrow, its root problems remain: outdated maps that do not accurately capture risk, underpriced policies for older properties that are frequently flooded, a lack of reserves to tap in catastrophes, and its unintended encouragement of risky development.

Hurricane Katrina exposed those flaws, while leaving the NFIP under an unprecedented red tide of debt. Though still being tallied, claims for the 2005 hurricane season are expected to reach $22 billion, most of that from Katrina. The losses would be more than 10 times greater than the $2 billion in premiums that the program took in last year and, in fact, nearly equal to the total collected from 1978 through 2004.

Insurance experts say the storm surge of trouble has been building for three decades, along not only the Gulf Coast but also the Jersey Shore, and beside inland waterways like the Delaware River and the Schuylkill, the Pennypack Creek and Assunpink. There, as all over the country where flooding is chronic and year-round, the federal government has paid dearly for insuring real estate that the private market wouldn't touch with a 10-foot oar.

From West Norriton in Montgomery County, to Yardley in Bucks County (inundated three times in the last 18 months), to Ocean City, policyholders have boosted New Jersey and Pennsylvania into seventh and eighth place among the nation's flood-loss leaders. Since 1978, when FEMA took the NFIP's helm, claims totaling $1.27 billion have been paid in the two states combined. (More have been filed, but about 20 percent are rejected.)

Bucks and Montgomery Counties are notable contributors.

In the Delaware River Basin, running from upstate New York to the Delaware Bay, more than half of the "repeat-loss" claims - on properties that have filed at least twice - have come from those two counties.

Citing privacy, FEMA does not disclose addresses of properties that have collected from the NFIP. The Inquirer is challenging that policy, arguing that the information is vital to the public's understanding of FEMA decisions that are costing taxpayers billions of dollars.

However, based on other data from FEMA and the Delaware River Basin Commission, West Norriton is first and Yardley second on the region's worst-of-the-worst list, the NFIP's elite Repetitive Loss Target Group. To make the cut, a property must have filed at least four significant claims in 10 years, or total claims that exceed its value. There are 27 such properties in West Norriton, 20 in Yardley.

Told of his community's distinction, West Norriton Police Chief Robert Adams replied, "It doesn't surprise me."

"When it starts raining like this," he said on an afternoon of drenching downpours, "it scares the hell out of me."

His responsibilities include one of the region's flooding trouble spots: the picturesque Port Indian neighborhood right on the bank of the Schuylkill, where houses have sold recently for as much as $600,000.

Like a quarter of the homes insured by the NFIP, most of the 72 houses on East and West Indian Lane were built before the era of floodplain mapping, which began in the mid-1970s.

Jim Sypherd, 62, has seen cars and empty boats float by his back door. In 1978, after at least three flood claims, he decided to rebuild his house - and elevate it, as the NFIP required. Since turning his first floor into essentially a cinder-block flood channel, he has filed only one claim, he said.

Still, life can be a watery adventure. In 1999, Hurricane Floyd left 10-foot-high water marks.

Sypherd, a retired Girard College teacher, stays for a simple reason: It's one of the most scenic neighborhoods in the region, with spectacular river views.

He is thankful for the NFIP, he said, for "it allows you to capture to some degree what you lost." But, Sypherd added, he and his neighbors realize even a government program has finite resources.

"We wonder," he said, "how long it can go on."

Best-laid plans...

Congress' cup was running over with good intentions when it chartered the National Flood Insurance Program.

In theory at least, the NFIP would be the catalyst for a new era of judicious planning and building in flood-plagued communities. Policies would be available only in towns that adopted certain anti-flooding measures, which would restrict development in high-risk areas and hold down losses on buildings already there.

So the NFIP could accurately assess policyholders' risks and set rates, the federal government undertook one of the most exhaustive mapping projects in American history to identify flood-prone areas for the first time.

By making floodplains safer and having property owners chip in for damages, the NFIP was supposed to contain disaster aid and thus save taxpayers money.

The policies, which had so much riding on them, went on sale in June 1969. Private insurers would write them, but not have to assume any of the risks.

At first, the program was run by the Department of Housing and Urban Development. But after 10 years, it was transferred to FEMA.

J. Robert Hunter, director of insurance for the Consumer Federation of America, was the NFIP's director from 1974-78. He recalled opposing the transfer. HUD, he said, was experienced at attending to housing and public-welfare needs, and was a better fit for the NFIP than the new disaster-aid agency.

Contrary to standard practice in the insurance industry, Congress allowed the NFIP to operate without any reserves. The program's designers counted on premiums to pay claims and, in years with heavy losses, on the Treasury to lend the money.

Most of the time, it worked - in part because the lifespan of the program largely coincided with a streak of mild hurricane seasons.

"The best thing the National Flood Insurance Program had going for it was a run of good luck," said Sen. Richard Shelby (D., Ala.), chairman of the Banking Committee, as he introduced a reform bill in May.

So what went wrong with the NFIP?

According to insurance experts, almost anything that could.

Deep discounts

From the start, the NFIP gave bargain rates on buildings that predated flood mapping. The logic: Mortgage lenders would force owners of new homes in floodplains to take out the policies, but owners of older properties would need an incentive.

The program's architects believed that as towns enacted stiff anti-flooding ordinances, old homes that were repeatedly swamped would be razed and eventually disappear from the insurance rolls.

It didn't happen.

Of the properties the NFIP insures today, about one-quarter are older homes, many enjoying a 60 to 65 percent discount. The average annual premium is about $450 nationally, $650 in Pennsylvania and New Jersey.

In the wake of last year's terrible trio - Katrina, Wilma and Rita - 60 percent of the properties filing hurricane-related claims had been built before the 1970s. Those 112,100 NFIP customers were eligible for discounts.

If the program did away with bargain rates, according to a congressional report, its annual income would be not $2 billion but $3.3 billion.

Repetition, repetition

Repeat claims have drained the program. And the source of more than 90 percent of them are the properties with heavily discounted policies.

The Philadelphia region has no dearth of repeat claimants. One unidentified suburban property has been the source of 22 claims.

Among 515 towns in New Jersey, Ocean City is No. 2 on the multiple-hit list. Since 1978, 1,793 claims have been filed on 469 properties, about four per structure; the losses total $13.1 million. Trenton is eighth with $9.2 million in NFIP payouts, ahead of 10th-place Atlantic City with $7.9 million.

Repeat losers account for about two-thirds of the $29.1 million in claims filed in the same period in the densely populated Pennypack Creek watershed, freshly remapped by Temple University's Center for Sustainable Communities. In Upper Dublin Township, which straddles the Pennypack and Sandy Run Creek watersheds, the NFIP has paid out about $9 million in claims on 105 properties in nearly three decades. More than half the losses were incurred by 19 of them.

Some are in the Fort Washington Office Park, which has grown out of a swamp during the last half-century and will be the subject of the Temple team's next project.

To buy or not to buy

Officially, flood insurance is mandatory for anyone buying property in a 100-year floodplain with a mortgage from a federally regulated or federally backed lender.

However, FEMA has virtually no enforcement power, and mortgage lenders evidently have not been diligent in insisting that borrowers are covered.

According to the Government Accountability Office, FEMA isn't even certain what percentage of homeowners in floodplains have policies. However, a study by the Rand Corp., a think tank, found that fewer than half the properties in 100-year floodplains nationwide are covered. In the Northeast, the percentage drops below 30.

The policies also are available to people who live outside floodplains, but fewer than 1 percent buy them.

About those maps

Former NFIP director Hunter has lambasted FEMA's floodplain maps as "a disaster."

Katrina seconded that.

Its storm surges far exceeded expectations. One reason: FEMA's flood map for New Orleans, where sea level has been rising, was 21 years old.

The map for nearby Hancock County, Miss., site of one of the biggest storm surges ever recorded, was a year older. Hunter, a New Orleans native, pointed out that the map indicates that the ground floors of homes and businesses need to be elevated only 14 to 19 feet above sea level to be safe. The surge there was 24 feet.

FEMA's aging map inventory has not only led to bad building decisions, Hunter said, but has also created a false sense of security for some homeowners who decide they don't need flood insurance. That in turn deprives the NFIP of premium income.

In the Philadelphia area, the volatile Darby Creek appears on a FEMA map dated 1993.

Yardley's chart is vintage 1999. "Not bad for FEMA, not good for us," said C. William Winslade, the borough manager, pointing out that data for the map were probably collected three years before.

In the last decade, he said, development and the ever-changing Delaware River have radically altered the Yardley landscape.

For all its failings, the NFIP has introduced communities to floodplain management, said Rutherford Platt, an NFIP specialist and a professor of planning law at the University of Massachusetts.

Using NFIP guidelines, property owners in floodplains across the country have minimized their losses - even saved their lives - by taking such steps as putting their houses on stilts.

However, others such as Hunter and M. Richard Nalbandian, a geologist on the Temple mapping team, argue that those houses shouldn't be there in the first place. For that, they blame the government. By providing flood insurance that would be otherwise unavailable, they say, the NFIP has promoted unwise development and, ironically, driven up the disaster aid it was intended to reduce.

Max Mayfield, retiring director of the National Hurricane Center, warned last month that coastal building had set up the nation for a disaster that would dwarf Katrina. The NFIP, he said, has helped pave the way.

"I see little reason for the public to subsidize private folly," Nalbandian said.

If people want to live in floodplains, he said, "let them do it at their risk, not the public's risk."

Back to the Flood Insurance Study

Back To The Index

Real Estate Directory