Flood Insurance History & Reformation

Flooding is the most catastrophic natural hazard and causes, on average, $3 billion dollars in damage annually.

In 1936 The Flood Control Act was the first national program aimed at flood damage.

In 1965 Hurricane Betsy caused over $1 billion dollars in damage along the Gulf Coast of Florida to Louisiana, and was the first storm of its kind to do so. Due to the catastrophe that Betsy had caused, the National Flood Insurance Act was passed three years later. For the first time, homeowners and businesses could purchase flood insurance through the National Flood Insurance Program.

Over the last 50 years these programs have grown exponentially and there have been many reformations thereof.

The program’s growth was explosive and along the way some key changes were made. The Flood Disaster Protection Act of 1973 expanded the NFIP by greatly increasing the coverage limits of homeowners and business owners. The act also required that flood-prone communities participate in the program as well as mandating flood insurance where federally regulated loans were issued.

In 1976 the concept of Base Flood Elevation, or BFE, was introduced to the program’s flood insurance-rate maps. This concept is important since the higher a structure is built above an elevation the less risk of flood damage and thus a lower flood insurance premium.

With the help of these and other reforms the program continued to expand to more and more communities. By 1994 the program was responsible for 3 million policies and the $1 billion dollar annual premium generated over $349 billion in insurance coverage for homes and businesses. However, the year before had shown that participation was still not robust enough to protect against major flood disasters. The major floods of 1993 showed that only 10% of buildings damaged were covered by flood insurance. In response, congress enacted the National Flood Insurance Act. This, among other things, created the concept of “Repetitive- Loss Properties”

Repetitive-Loss Properties

These properties have experienced multiple flood losses. Although they only represent about 1%of the insured properties in the program, they are responsible for 25-30% of total annual claims losses.

A decade later, the Reform Act of 2004 distinguished the difference between “repetitive-loss properties” and “severe repetitive-loss properties.”

Severe Repetitive-Loss Properties (SRL)

Properties that are consistently needing to be re-built. There have been 4 or more separate claims over $5,000 each – or there have been 2 or more separate claim payments where total claims (in a 10 year period) are more than the current value of the property.

Thanks to continuing reform efforts like these, the program has been able to stay sound, strong, and reliable without forcing tax payers to pay extra.

This program worked well until… Hurricane Katrina.

During the 2005 hurricane season the Gulf Coast of the United States took a hit that no one could have foreseen. As weather disasters, such as hurricanes Katrina, Wilma, and Rita, have gotten much more severe further reforms were required. The hurricane season of 2005 resulted in $17.6 billion in claims paid, far in excess of the premiums paid that year.

Biggert – Waters Reform of 2012

1)      Provide stability to the NFIP

2)      A risk-based program

The Biggert-Waters Reform of 2012 emphasizes the importance of taking in enough money in premiums to cover any claims losses. This reflects the soundness of the program. BW12 directs FEMA to discontinue grandfathered rates and re-assess risk of properties based on newer flood maps. FEMA expects to implement this reform on October 1st, 2014.

The act ensures that the NFIP will be able to meet our nations flood insurance needs in the future.

This also incorporates new requirements for lenders. Lending regulators are still in the process of initiating rules and regulations. New escrow requirements will be implemented in 2014.

For more information on anything you have read here, as well as flood insurance requirements, please visit www.FEMA.gov