With the National Flood Insurance Program (NFIP) set to expire in September, flood insurance reform is a hot topic up for discussion. As part of the process, the government must answer some hard questions when it comes to resolving problems that have reoccurred year after year. What should be done with the properties that continually flood, causing the program hardship? How will climate changes impact the need for the program? And, what options are available that can both lessen the burden on the government and not add more to FEMA's nearly $25 billion debt?
A Reoccurring Issue
Let’s start with one of the major issues—properties that flood over and over and over again. These properties are also known as the Severe Repetitive Loss Properties. This billion-dollar issue breaks down to about 0.5% of properties that receive coverage under the NFIP and 10.6% of all claims paid since the start of the program. The Severe Repetitive Loss Properties have collected about $2 billion in flood claims. So, what can be done to solve this problem that continually adds hardship to not only the NFIP but to the occupants who live at these properties? One suggestion for these properties is a buy-out option. According to the Natural Resources Defense Council (NRDC), it would cost an estimated $2 billion to buy out these properties. However, considering it has already cost that much in claims, the buyout option may make the most sense for this group of properties rather than continuing to add to that $2 billion claim amount.
Changes to the climate are inevitable and unavoidable. Climate changes can impact a number of factors including a rise in sea levels and more extreme whether events occurring more often than previous years. These natural occurrences are taking a toll on the NFIP and possibly increasing the amount taxpayers contribute to flood relief payouts. Climate changes are always top of mind when it comes to flood insurance reform and when the program expires later this year, there’s no doubt that the impact of this topic will greatly affect future changes. Some possible outcomes may include redrawing of current flood zone boundaries. What does this mean to property owners? If they were not previously in a flood zone or required to purchase flood insurance, this may change and they would be required to purchase flood insurance in order to qualify for a mortgage. Only time will tell how lawmakers’ views on climate changes will affect the future of flood insurance reform.
A Private Sector
With the extreme amount of debt that the NFIP has accumulated over the years, one solution that has been the main topic for lawmakers is the development of a private flood insurance industry. By creating a private sector for flood insurance, much of the pressure would be lifted off the shoulders of the federal program that is currently in place. It also goes without saying that the federal program needs support as it will only get worse as natural disasters continue to occur at a more frequent rate. With a private flood insurance market in place, much of the risk would be shared among those who are part of this private sector. This is something that is up for debate for this year’s flood insurance reform.
As a lender, there’s a lot to consider when it comes to the topic of flood insurance reform. The biggest implication for lenders is going to be to ensure that their outstanding risks, or loans, are protected regardless of the flood insurance reform status. Lenders already require flood insurance if the property is in a flood zone, but it’s vital for financial institutions to constantly re-evaluate their lending portfolio to assess homes currently in high-risk flood zones. Taking the proper measures now to ensure every property is compliant with their flood zone requirements will save lenders time and money later. With current climate change predictions, it’s also a must to be one step ahead by evaluating which homes could potentially become high risk as sea levels rise and other climate changes occur. Be prepared so that your financial institution is ready for anything that may come in the future.
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