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Sara Robben
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NAIC Center for Insurance Policy and Research (CIPR)

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National Flood Insurance Program (NFIP)

Last Updated 9/25/2018

Issue: Floods are the most common and most destructive natural disaster in the United States. Ninety percent of all natural disasters involve flooding, and all 50 states have experienced floods or flash floods in the past five years, according to Floodsmart.gov. The damage from a flood is not covered under a standard homeowner's policy. Flood insurance is a special policy that is federally backed by the National Flood Insurance Program (NFIP) and available for homeowners, renters and businesses.

Background: The NFIP was created as a result of the passage of the National Flood Insurance Act of 1968. Congress enacted the NFIP primarily in response to the lack of availability of private insurance and continued increases in federal disaster assistance due to floods. At the time, flood was viewed as an uninsurable risk and coverage was virtually unavailable from private insurance markets following frequent widespread flooding along the Mississippi River in the early 1960s. The NFIP is a Federal program, managed by the Federal Emergency Management Administration (FEMA), and has three components: to provide flood insurance, to improve floodplain management and to develop maps of flood hazard zones.

The NFIP allows property owners in participating communities to buy insurance to protect against flood losses. Participating communities are required to establish management regulations in order to reduce future flood damages. This insurance is intended to furnish as an insurance alternative to disaster assistance and reduces the rising costs of repairing damage to buildings and their contents caused by flood. A homeowner is able to purchase excess flood insurance, but they must be covered by NFIP flood insurance first. Information detailing how to obtain flood insurance can be found at www.floodsmart.gov.

Since NFIP’s inception, additional legislation has been enacted to strengthen the program, ensure its fiscal soundness and inform its mapping and insurance rate-setting. More recently:

  • On July 6, 2012, President Obama signed into law the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12),which reauthorized the NFIP through Sept. 30, 2017, and made a number of reforms aimed at making the program more financially and structurally sound. The purpose of the legislation was to change the way the NFIP operates and to raise rates to reflect true flood risk, as well as make the program more financially stable. As implementation moved forward, constituent concerns over flood insurance premium increases prompted legislative efforts to modify some of the BW-12 reforms.

  • On March 21, 2014, President Obama signed the Homeowner Flood Insurance Affordability Act of 2014 into law, which repeals and modifies certain BW-12 provisions and makes additional program changes to other aspects of the NFIP. According to FEMA, the law lowers the rate increases on some policies, prevents some future rate increases, and implements a surcharge on all policyholders. It also repeals certain rate increases that have already gone into effect and provides for refunds to those policyholders.

Click here for an overview of the Homeowner Flood Insurance Affordability Act of 2014.

Private Flood Insurance

The Flood Insurance Market Parity and Modernization Act (H.R. 2901) was recently introduced to help facilitate the development of the private flood market and to address some of the unintended consequences resulting from the BW-12. Provisions in BW-12 have made it more difficult for companies willing to offer private flood insurance products.

While the market for private flood insurance remains relatively small, in recent years, more sophisticated risk mapping and modeling have developed, enabling the private market to more accurately price the risk and generating new interest among private insurers to provide such coverage. Although BW-12 affirmed Congress’s intent that lenders can accept private flood insurance as an alternative to the NFIP, the definition and prescriptive conditions have created a significant obstacle impeding the development of a private market.

Status: The NAIC Property and Casualty (C) Committee is charged to coordinate with the NFIP on the regulation of flood insurance and to continue developing a handbook or white paper to assist state insurance regulators in understanding the federal flood insurance program and how it interacts with state insurance regulation.

In addition, the NAIC Center for Insurance Policy and Research (CIPR) discussed flood insurance at an event held during the Spring 2017 National Meeting. The Future of Flood Insurance event examined the NFIP and the market’s state and included a panel discussion on the roles of the private and public sectors in reforming flood insurance. The CIPR also recently released a study, Flood Risk and Insurance, which examines the rising flood risk in the country and the need to overhaul the NFIP while encouraging greater growth in the private flood insurance market

NFIP was originally set to expire in September 2017. On March 23, the NFIP was reauthorized until July 31, 2018. The extension was included in the $1.3 trillion omnibus spending bill signed by President Donald Trump. On June 28, the U.S. Senate approved its version of the farm bill, which includes an amendment that would extend the authorization of the NFIP for six months. The NAIC and state insurance regulators support a long-term reauthorization of the NFIP to avoid short-term extensions and program lapses that create uncertainty in both the insurance and housing markets. Reauthorization should be for a minimum of ten years.

The NAIC's NFIP reauthorization recommendations for Congress includes encouraging greater growth in the private flood insurance market. Congress faces the challenge of trying to maintain a balance between improving the financial solvency of the program and reducing taxpayer exposure while also being mindful of affordability concerns.

It should be noted, the Federal Emergency Management Agency (FEMA) began using reinsurance for the first time in 2016 with $1 million of flood reinsurance for the NFIP. In January 2017, FEMA then secured a billion-dollar reinsurance policy for the NFIP. For 2018, FEMA secured $1.46 billion in reinsurance to cover any qualifying flood losses in excess of $4 billion per event occurring in calendar year 2018. As of April 2, 2018, FEMA had paid over $8.6 billion in Hurricane Harvey losses for which it recovered $1.042 billion from its reinsurers. The Disaster Assistance Risk Transfer Act of 2018 was introduced to Congress in May. The new bill would require the FEMA to purchase more insurance, reinsurance and capital market tools for a broader range of disaster-related costs. The Disaster Assistance Risk Transfer Act of 2018 was introduced to Congress in May. The new bill would require the FEMA to purchase more insurance, reinsurance and capital market tools for a broader range of disaster-related costs.