Truth in the NFIP

The National Flood Insurance Program (NFIP) has been in the national news recently in a series of critical reports.  One story criticized how the NFIP is using insureds’ premiums to deny claims and overpay insurance companies.  Another criticized a proposed FEMA rule change allowing homeowners to rebuild after receiving a demolition grant for a flood-prone home.  The news has criticized FEMA and the NFIP without sufficient research and explanation.  There are issues with the NFIP’s administration and FEMA’s grant proposals, but going just below the surface clarifies the story beyond the initial sensational headlines.


A few weeks ago, a national news station ran a scathing piece about how two thirds of NFIP premium dollars go to private insurance companies and their lawyers.  This makes the NFIP sound extremely dysfunctional.  The NFIP is administered by private insurance companies called Write Your Own companies (WYO).  The WYO’s manage about 80% of flood policies within the NFIP, while the NFIP manages the remaining 20%.  Premiums are collected by the companies and deposited to the Federal Government where all NFIP administrative costs are then paid.  Over time, the WYO’s found that it was too costly to administer the NFIP program themselves.  So service providing companies were born.  Now almost all of the approximately 75 WYO companies use service providers.  WYO’s pay the service providers to underwrite policies, handle claims, and support customer needs, improving the flood program consumer experience.


The WYO’s receive 30% of each policy sold through the NFIP to reimburse them for their expenses and pays out approximately 18% to its agents.  This leaves the WYO with near 12% to handle all other expenses.  While the agent appears to make plenty on a flood policy, the average flood policy costs a little over $900.  The cost of support leaves little to no excess. At the end of the day, the WYO’s average profit is 2-5% of the original 30% and the agent receives no more than average reimbursement.


In the national news piece on the NFIP, the reporter focuses on two apparent underpaid flood claims.  One with dwelling coverage written for $176,000, claimed to have been underpaid by $40,000.  The insureds in this example may have a right to more funds, but the report fails to describe how the policy was written, possible exclusions, and other standard NFIP rules.  Also, more money can be submitted for a claim if damage is found after the initial claim is filed.


There are legitimate issues that arose from the poor handling of some Hurricane Sandy claims, and some insured were treated unfairly.  We should not ignore the problem.  But less than one half of one percent of NFIP claims end in court, with a large percentage of lawsuits coming from profiteering trial lawyers looking to sack a government program.  After Hurricane Harvey, one firm stated “In the event that your insurance carrier refuses to fully and timely compensate you… we’ll immediately begin preparing your case for trial.”  This type of incentive, regardless of scenario, entices frivolous lawsuits against the NFIP.


In February, FEMA was criticized for a proposed policy allowing homeowners to receive a demolition grant that allowed rebuilding on a demolished site.  FEMA would allow those with significant flood damage to directly apply to FEMA for a grant.  However, the proposal states that after the structure is demolished, the property owner could either sell the land to the local government as open space, or rebuilt to new, better standards which would avoid the continued flood losses. Currently, FEMA does not offer this type of grant directly to property owners, but only after the community applies on their behalf. If the community does not to apply, then no grant is awarded.  The proposal requires some improvement, such as requiring the grant to serve community-wide planning objectives.  However, this concept remains good in theory.


As a nation, we should not be apologists for a Federal program that, despite its pitfalls, is the largest and most successful floodplain management and mapping program in the world.  It saves taxpayers $2 billion annually simply due to good land use management.  While there are certainly issues with the program, the NFIP has saved billions in taxpayer funding, paid out over $60 billion in flood claims, and if reformed properly, could return to a sustainable NFIP that truly functions like an insurance program.