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National Flood Insurance Program and Reforms


The National Flood Insurance Program (NFIP) was created by Congress in 1968/9 as an integrated floodplain regulatory and flood insurance program. Significant flood mitigation activities - designed to reduce insurance claims - were added to the program in the 1994 and 2004 reforms. The NFIP is administered today by the Federal Emergency Management Agency (FEMA).

NFIP Reform legislation that became law in July 2012, significantly increased premiums and fundamentally abandoned the basic deal upon which the program was founded - essentially that the government would provide flood insurance at reasonable rates in exchange for communities regulating development to reduce future flood risk. The solvency and debt-reduction requirements imposed by the 2012 reforms - together with the raising of the limit on annual premium increases to 20% - virtually ensured that premiums would be going up across the board, across the nation, in all zones. But they would go up faster on properties that are too low in the flood zone and losing their subsidized and grandfathered rates. Flood Insurance Affordability legislation that became law in March 2014 restored grandfathering for flood insurance rates, but continued to chip away at subsidized rates for structures that were built before the community received its initial FIRM.

People who should be most attentive are owners of property that is a) in a special flood hazard area, b) below the elevation required for today's new construction, c) and in one of these categories:

  • Pre-FIRM rated - i.e., built before 1975 or before there was a Flood Insurance Rate Map (FIRM)
    • Rate increases to reflect the risk shown on the current FIRM will be reasonable for properties that are the principal residence of the insured.
    • Rates for other residential structures (rental houses, camps) are rising at 15-20% per year.
    • Rates for business properties are rising at 25% per year.
    • Rates for Severe Repetitive Loss properties will rise 25% per year. These properties have file multiple flood insurance claims and their policies are handled by FEMA Special Direct Facility.
    • Rates for Substantially Damaged or Substantially Improved properties. These properties should be Post-FIRM elevation-rated, but many were never converted from Pre-FIRM to Post0FIRM because the substantial repair of improvement was not noticed by the system.

  • Post-FIRM rated - i.e., the structure was built in compliance with a FIRM (current or historic FIRM) or, at some point, the property owner chose to have the flood insurance elevation-rated based on the FIRM that was effective at that time, because the premium would be less than the Pre-FIRM premium. These properties are seeing minimal rate increases


The pair of NFIP reforms in 2012 and 2014 left the program with a number of additional costs for insureds to bear including the following:

  • Surcharge per policy per year.
    • For the primary residence of the insured - $25/year
    • For all other structures and policies - $250/year
  • Reserve fund (to cover claims in high-loss years)
    • a percentage of the premium
  • Increased Federal Policy Fee
  • Congress required FEMA to give them a plan for how FEMA would repay the program's $25 Billion debt. There are about 5.5 million policies across which to distribute this obligation. There as been discussion about the 2017 re-authorization of the NFIP removing the debt-repayment requirement.


* See the EDEN page Flood Premiums Rising Dramatically for details and legislative updates.

NFIP - The Original Deal 

The NFIP was created with the intent of reducing future flood damage. Congress essentially made a deal with local governments, which can be summarized as follows:

  • Congress agreed to provide affordable (subsidized) flood insurance for properties that are already in harms way, and to insure newly constructed buildings at risk-based rates; buildings rated on risk would be allowed to keep their risk-class rate basis even if the true risk went up.
  • Communities wishing to have flood insurance available to their constituents agreed to regulate new construction such that buildings would not suffer damage in a flood of a certain magnitude. The benchmark flood was defined as the flood that has a 1% chance of occurring in any year (the 1% annual-chance flood, also known as the 100-year flood). Communities agreed also to enforce a 50% rule, which meant they would treat substantial improvement and substantial repairs as new construction when it came to preventing future flood damage.

The insurance subsidy is provided by giving the NFIP authority to borrow from the U.S. Treasury when it cannot pay claims; the NFIP must repay the debt. The program exercised this authority several times, repaying the debt each time, but has been unable to repay the $18 Billion debt incurred to honor claims that arose in 2005 hurricanes (Katrina, Rita and Wilma) and another $9 Billion incurred in 2012 for Hurricane Sandy. Congress has requested (in the 2012 reform legislation) a 10-year payback plan for the outstanding debt.


Program Assumptions and Adjustments 

The success of the NFIP would hinge on the validity of assumptions such as these:

  • that people want flood insurance and will purchase it if they don't have to;
  • that the federal government can define flood risk accurately and in ways that are useful to communities;
  • that a program that sells insurance for less than the cost of paying claims, and that cannot charge enough to build a catastrophic-reserve can survive;
  • that regulating new construction to a 1%-annual chance risk level, while allowing that 1% level to increase by a foot, would reduce future flood damage;
  • that communities actually have the capacity to enforce floodplain development regulations they have adopted; and
  • that if all the rules for new construction and substantial improvement and repair were followed, the old buildings would eventually go away and we'd be left with newly-constructed buildings that have very little risk of flooding.

Over the years the program has succeeded in guiding development such that buildings built under floodplain management regulations suffer less damage than older structures.  It has been criticized by some as tell people HOW to build in high-risk areas rather than discouraging them from building there.  As certain assumptions have been shown not to hold, Congress has amended and FEMA has enhanced the program to protect floodplains and encourage communities to be more pro-active in reducing losses.

In 1973, "mandatory purchase" was introduced, requiring lenders to ensure that flood-zone properties securing mortgages were protected by flood insurance. Penalties for lenders not enforcing mandatory purchase guidelines were instituted later, and continue to rise.

The 1994 Reform Act added two flood mitigation programs; these take money from the Flood Insurance Fund to pay for activities that will reduce the inventory of flood-prone properties. Increased Cost of Compliance (ICC) coverage, as part of the standard NFIP policy, encourages enforcement of the 50% substantial damage rule by providing funds to be used for elevating the building. The Flood Mitigation Assistance program provides grants to communities to floodproof or acquire properties in their jurisdications that are making repetitive claims on the NFIP. The 1994 Reform Act also formalized the Community Rating System (CRS), an initiative begun in the early nineties to encourage communities to help reduce NFIP claims by exceeding the minimum standards of the NFIP. Examples of exceeding minimum standards include requiring buildings to be one to three feet higher than the minimum required elevation; regulating construction in areas outside the special flood hazard areas; protecting the storage capacity of the floodplain; zoning the floodplain for low-density development; and developing managed drainage plans. CRS also encourages the community to reduce flood insurance claims by educating consumers and by taking steps to reduce the number of flood-prone buildings in their communities. Rewards for the Community Rating System are realized as reduced premiums for policy-holders in the community.

Despite these attempts to improve the solvency of the NFIP, the program continued to carry a large number of properties that were paying subsidized rates, and many of those were making repeated claims. For some properties, the total claims exceed the value of the insured property. The program, however, could not deny flood insurance to properties that flooded repeatedly, nor could it charge higher premiums based on the property's flood history.

NFIP reforms in 2004 created two additional flood mitigation programs - also to be funded through the flood insurance fund - and gave the NFIP the authority to increase premiums by 50% per flood on severe repetitive loss properties if they refused an offer of mitigation assistance. The program came on line slowly, as did a companion element of that legislation that would make ICC coverage available for the non-federal match of a mitigation grant project (without there being a concurrent flood loss).

This 2011 article by John Egan on presents interesting NFIP statistics and captures the sense of frustration among legislators that lead to the 2012 NFIP Reform Act.


2012 NFIP Reform - Deal Off 

The 2012 NFIP Reform legislation passed as Title II of the Transportation Bill (H.R. 4348) and was signed into law (PL 112-141) on July 6, 2012. It extended the NFIP for five years and made a number of changes related to improving the solvency of the NFIP, flood risk mapping (including mapping of levee-protected areas), and flood mitigation programs. It raised the limit on annual premium increases to 20% (from 10%) and requires FEMA to submit a ten-year repayment plan for the program's debt to the U.S. Treasury, most of which was incurred during the 2005 hurricane season.

Since the beginning of the National Flood Insurance Program (NFIP) owners of buildings that found themselves too low in the flood zone through no fault of their own have been given a break on their flood insurance premiums. These properties have been insured by the NFIP, a federally run insurance program, at rates that do not reflect the true risk of flood damage. The policies are subsidized by the NFIP, which can borrow from the U.S. Treasury when premium collections are not sufficient to pay claims. The loan must be repaid.

The no fault part of this condition means one of two things:

  1. The building was built before 1975 or before the community (governing jurisdiction) received its first Flood Insurance Rate Map (FIRM). These properties are insured at Pre-FIRM rates, unless the owner shows by an official elevation survey that the building is NOT too low and elects to be rated based on elevation.
  2. The building was built Post-FIRM, in compliance with a FIRM, with a permit from the community, but a more recent FIRM shows the building to be at greater risk of flooding. These buildings have been grandfathered administratively, and allowed to keep the rate-class (flood zone and building elevation relative to BFE) that applied at the time of construction.

    Pre-FIRM and grandfathered rates were discontinued by the 2012 legislation. Grandfathering was fully restored by the 2014 legislation, before its cancellation had been implemented. No policies lost their grandfathered rates. Pre-FIRM rates remain with the property, not the owner. However, for all Pre-FIRM rated policies except the residence of the insured, rates are going "actuarial" at a rate of 18%-25% increase per year.

See these related articles in EDEN:

Flood Premiums Rising Dramatically 
Flood Insurance Issues in Recovery


Definitions and Technical Resources 

Base Flood Elevation (BFE) - The base flood is the 1%-annual-chance flood, commonly called the "hundred year flood." Base Flood Elevation is the water-surface elevation of the base flood. The depth of the base flood can be calculated by subtracting the ground elevation from the BFE. The probability is 1% that rising water will reach BFE height in any year; which compounds over a thirty-year period to 26% or more.

In the flood zone - This term is used by most people to mean the property is in the Special Flood Hazard Area (SFHA), as depicted on the Flood Insurance Rate Map (FIRM). The NFIP flood zones are A and V zones and sometimes have letters or numbers following the A or V (e.g. AE, AH, AO, VE). The officially adopted FIRM is the basis for all flood insurance rating. The community may be using a more restrictive map with broader flood zones and higher flood standards for regulating floodplain development. The community's regulatory map also may include allowances for increased runoff, subsidence, failure of dams and levees, or sea level rise, which are not reflected on the FIRM.

Too low- From an insurance-rating standpoint, "too low" means the elevation of the building is lower than the BFE. Building elevation in the A-zones is measured at the top of the lowest floor. Elevation in the V-zones is measured at the bottom of the lowest horizontal structural member of the foundation. Enclosures that are lower than the living space may be considered the "lowest floor" in some circumstances; machinery and equipment located below the living space may raise insurance rates. The following resources may be helpful:
NFIP Elevation Certificate with lowest floor diagrams
FEMA Technical Bulletin 1-08: Openings in Foundation Walls and Walls of Enclosures

From a practical standpoint, "too low" means the risk of flooding is higher, a fact that has been concealed till now by artificially low (subsidized) insurance rating. The lower you are relative to BFE, the higher your risk of flooding. Being “too low” in the flood zone can cause hardship for the owner if the building is substantially damaged by fire, flood, tornado, earthquake or other event and must be raised before it can be repaired. The cost of raising the building usually is not covered by home owners insurance, but may be offset to some extent by the Increased Cost of Compliance coverage of the NFIP policy.

NFIP Community Status Book - Use this to find out which communities in your state participate in the NFIP, when they entered, and the dates of their first and current Effective FIRM. Data are presented in Adobe PDF, comma separated values (CSV) text file, and HTML formats.

State NFIP Coordinators - maintained by the Association of State Floodplain Managers. State coordinators will know their local floodplain administrators.


Last Updated:6/8/2016 2:28 PM

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