Coastal Counties Cause $1.4 Billion National Flood Insurance Program Shortfall, Congressional Budget Office Reports

As the National Flood Insurance Program’s (“NFIP’s”) September 30, 2017 re-authorization deadline nears, federal lawmakers have sought information from the Congressional Budget Office (“CBO”) about the NFIP’s financial soundness and its affordability for policyholders.

The CBO analyzed roughly 5 million NFIP policies in effect on August 31, 2016, which approximate the policies currently in place.  The agency assessed the NFIP’s financial soundness by comparing expected annual costs and premiums; expected costs included estimates of expected claims projected using commercially available models that simulate large numbers of potential flooding events along with their probability.

To assess the NFIP’s affordability for policyholders, the CBO compared premiums with household income.

Among other data and analysis, the resulting report outlines 12 policy approaches that would generally involve tradeoffs between varying objectives.  Although some could be difficult to implement, the CBO said, each could help achieve at least one of three goals for the NFIP:

• Improve solvency by increasing premium income from policyholders in general, reducing the use of discounted rates, or increasing the share of costs borne by certain categories of policyholders or by taxpayers generally;
• Better align premiums with risks by reducing the use of subsidies, including discounted rates and cross-subsidies (in which some policyholders are charged rates that are higher than their expected claims so that other policyholders can pay rates that are lower than their expected claims), or by adjusting premiums to better reflect underlying risk factors; or
• Keep costs low for some policyholders (perhaps while raising them for others) by targeting subsidies to low-income policyholders, shifting costs to taxpayers, or adjusting premiums to reflect the value of insured properties.

To read the report and its accompanying documents, click here.

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