Federal Flood Insurance Program Running Out of Money

With insurance claims from Hurricane Sandy pouring in by the thousands each day and damage from the storm potentially reaching $7 billion, the debt-ridden federal flood insurance program may run out of money.

Hurricane Sandy is on track to be the second worst-insured flood in US history, Reuters reports, second only to Hurricane Katrina.

And the storm has proved to officials that the system of assigning premiums to homeowners in risky areas is inadequate, according to the New York Times.

"It had become crystal clear, and it will probably become a little bit more clear, post-Sandy, that the premium structure was woefully inadequate," said Tom Santos, vice-president for federal affairs at the American Insurance Association.

The National Flood Insurance Program has already borrowed about $18 billion, largely to pay for damage from Hurricane Katrina, and can only borrow a total of $20.8 billion, according to the Wall Street Journal.

The program can only borrow $3.7 billion before asking Congress for more money.

Although Congress recently changed the program to allow large increases in premiums to vacation homes and those that repeatedly flood, critics argue that even higher premiums are needed to prevent federal funds from paying for homes built--or rebuilt--in vulnerable areas.

Should Congress be pressed for more money, debate could potentially heat up again between states affected by flooding and those who don't want to pay for it.

Changes under consideration include updating out of date flood maps and stronger building codes.

To address damage from Hurricane Sandy, 44 members of the House of Representatives have asked Congress to spend whatever money is necessary to help victims recover from the storm--and say the changes already made to the program must be given time to work. They contest that victims of Hurricane Sandy must receive assistance, and Congress must step up.

"It is a program we require people to participate in, so we have to make sure it is adequately funded to handle claims," Rep. Timothy H. Bishop, D-N.Y., told the New York Times. "You can't say: 'Awfully sorry. Hope this works out for you.'"

But homeowners in New York and New Jersey have fought further changes to the program, and resisted changes such as building sand dunes and elevating homes to protect against flooding.

Rep. Earl Blumenauer, D-Ore., argued that the program is "throwing money to support something that is going to end up creating more victims and costing more money in the future.

The program insures 5.7 million homes near coasts or flood-prone rivers, the New York Times reports. Most homeowners insurance does not cover floods, and that insurance must be purchased through the federal program.

But Loretta Worters of the Insurance Information Institute told the New York Times that only 18 percent of Americans have flood insurance.

And the vast majority of claims are paid to a small portion of the homes -- many of which repeatedly flood.

The federal program collects about $3.5 billion in annual premiums, with private insurance companies making about $1 billion each year for helping the government sell and service the policies.

But Ray Lehmann of the R Street Institute, a free market think tank focused on insurance issues, said Congress should require FEMA to use reinsurance or sell catastrophe bonds to offload some risk to the private sector.

The government should phase in market rates for all consumers who buy flood policies, Lehmann told the Wall Street Journal, and eliminate subsidies for properties before the 1970s.

"That creates the conditions that, over the longer term, can make a full privatization of the (flood insurance program) a real possibility," he said.