Flood Insurance (2): the facts

While waiting to hear whether Congress will take up a bill to delay the implementation of the new flood insurance premiums they voted into law before they understood the consequences ( telling  the National Flood Insurance Program, NFIP, which is losing money to end subsidies and go to full actuarial rates results in premiums going up. Apparently nobody in Congress took any economics courses in college and this has come as a surprise to them – or maybe it was just because they don’t read Bills before voting on them), I have been digging into the history of the NFIP. In particular I have looked at the record of Massachusetts as a whole, by County and by Town.

It is extraordinary how many reports I have read on flood insurance without any of them providing basic data. Tracking down what follows has been a challenging task but I think the numbers are accurate and provide an understanding of the magnitude of the subject.

I will start with the overall NFIP.

As of September 2013, there were 5.6 million flood insurance policies in force (PIF).Two-thirds of the policies were in just 6 States; Massachusetts has just 60,000 of the 5.6 million policies, or 1.1%:

Source: FEMA, Oliver Reports

It is generally accepted that the NFIP worked reasonably well until the huge losses from Hurricane Katrina in 2005, and again from Hurricane Sandy in 2012. I ran some numbers back to 2000 for the total premiums received by NFIP and claims paid:

Sources: FEMA, Oliver Reports

These numbers show that premiums and claims paid were about equal over this period. Note that there is no column for expenses (I have tried to make sense of the NFIP budget but it is beyond the capability of someone who spent a career as a research analyst and investment banker. Clearly I don’t speak Government).

Also note NFIP has a September year end, so these numbers are pre-Sandy, an event which is estimated to have cost the NFIP over $7 billion. The 2013 numbers will look very different.

Over the period 1978-2012 NFIP paid a total of $50.2 billion in claims. Almost 80% of the claims were paid in just 6 States:

Source: FEMA, Oliver Reports

Note that claims paid in MA over 36 years were just $345 million out of over $50 billion. Again, these figures are pre Sandy.

Here is a breakdown for MA by County for PIF and paid losses 1978-2012:

Sources: FEMA, Oliver Reports

In all some 61 MA cities and towns had paid losses of $1 million or more over the 1978-2012 period. Scituate has by far the highest level of claims at almost $60 million. The top 12 towns accounted for 53% of the claims:

Source: FEMA, Oliver Reports

And finally losses by town in Essex County:

Sources: FEMA, Oliver Reports

These numbers cover a large time frame. Many cities and towns have implemented plans in recent years to improve their defenses against floods.

Here is an extract from a Congressional Research Service report of February 2013:

“…residents who have a federally backed mortgage and live in a floodplain are required to have insurance against flood. However, these individuals often do not purchase the mandatory insurance coverage. Estimates are that only 15% to 25% of at-risk properties in Special Flood Hazard Areas (SFHA) in the Northeast were insured for flood losses.Only 38,785 residential and business policies were in force in New York City, out of an estimated 7.2 million households (2010 census), as of August 31, 2012; and only 8,129 households (out of about 39,000 households) and businesses in Atlantic  City, NJ, had federal flood insurance coverage. Nationally, recent reports suggested that only 18% of Americans in flood zone areas have flood insurance, which raised the possibility of high uninsured flood-related losses.”

The Wharton Center for Risk Management  published an analysis of the NFIP in 2011. Here are some of its conclusions:

– at the end of 2004 the NFIP was facing a $1.5 billion cumulative deficit since its inception in 1968 (in 2008 prices). This deficit seemed manageable given the scope of the program

– the program, which was not designed to cover truly catastrophic losses by itself, borrowed over $19 billion from the Treasury to pay claims from the 2005 and 2008 hurricane seasons

– Some States – FL, CA, CO – paid more in premiums than they received in claims, while others – LA, TX – collected a lot more in claims than they paid in premiums.

I shall end this installment with some questions:

–  if only 18% of Americans in flood zones have insurance, does it not make more sense to work to get everybody with exposure into the NFIP rather than force up rates on those who are already paying premiums, most of whom have never made and will never make a claim?

– does it make sense to try to include small, frequent losses as well as infrequent, catastrophic events in one program?

– why are homeowners with a grandfathered policy allowed only one option – $250,000 of coverage with a $1,000 deductible?

In the next installment I plan to write about the specific steps Marblehead has taken to mitigate the effects of floods.

If you are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 781.631.1223 or andrew@HarborsideRealty.com.

Andrew Oliver is a Realtor with Harborside Realty in Marblehead.