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 InsuranceQuotes.com presents interesting NFIP statistics and captures the sense of frustration among legislators that lead to the 2012 NFIP Reform Act.