In her research paper for the American Action Forum, author Meghan Milloy urges policymakers to make several major changes to the National Flood Insurance Program (NFIP). Noting that the NFIP is slated for renewal by Congress in 2017, Milloy exhorts policymakers to “avoid a blanket stamp of approval” and to make necessary improvements to the NFIP, which she characterizes as an “indebted and inefficient program.” In her March 9, 2016, paper, titled “The NFIP is Due for Some Major Reforms,” Milloy sketches the history of the NFIP, outlines the program’s current problems and challenges, and offers recommendations for its reform.
Milloy is the Director of Financial Services Policy at the American Action Forum.
In Milloy’s estimation, the NFIP’s biggest problems and challenges are threefold. First, there is a low rate of compliance with the NFIP. Only 53 percent of the nearly 1.5 million structures in designated Special Flood Hazard areas that are required to be covered under the NFIP are actually covered. Moreover, since there are fewer flood insurance policies in place than are required, there is less revenue for the program. According to Milloy, the NFIP “has been in debt to taxpayers for over 10 years.”
Second, in connection with insurance premiums for the program, Milloy discerns several flaws: (1) the premiums don’t reflect the risk; (2) there are artificially low caps on premium increases; (3) “full risk” premiums are too low; and (4) the premium rates “rely on inaccurate data.”
Third, given the structure of the NFIP and the exceptional strain on the program that resulted from Hurricane Katrina in 2005 and Superstorm Sandy in 2012, the potential losses generated from the NFIP “have created substantial exposure for the federal government and U.S. taxpayers.” Milloy cites a 2013 report issued by the Government Accountability Office in support of the gravity of the NFIP’s indebtedness.
Based on these findings, Milloy offers several options for reforming the NFIP:
- Employ stronger enforcement measures to increase the number of NFIP policyholders, not only to ensure compliance but also to increase the amount of revenue coming into the NFIP via additional premium payments.
- Charge policyholders premiums that better reflect the actual amount of risk of loss to their properties and implement the “grandfathering” of existing policies to minimize any “rate shock” to the program.
- Return the NFIP to a status of self-sufficiency by sharing the risk of loss with the private flood insurance market—thus allowing the federal government to focus on “flood risk mitigation” while letting the private market focus on underwriting flood insurance policies.
- Update the NFIP’s technology in general and create a central repository for flood elevation data in particular.
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