Congress should insist on risk transfer before raising NFIP borrowing
Historically, the NFIP was permitted to borrow just $1 billion from the U.S. Treasury to pay unexpectedly high claims. However, in late 2005 and early 2006, Congress raised the borrowing cap to $20.775 billion, largely to pay record claims from Hurricane Katrina.
But with $18 billion of outstanding borrowing and just $900 million in cash premiums available to pay claims, the program is not expected to have enough resources to pay billions of dollars in claims from Hurricane Sandy, and is expected to request its borrowing cap be raised to roughly $25 billion.
“There is no question that the federal government must find a way to make good on its obligations to NFIP policyholders who paid their premiums in good faith,” said R.J. Lehmann, R Street senior fellow and public affairs director. “However, rather than hand this bankrupt program another blank check, we should insist it find ways to reduce future reliance on government borrowing.”
Under flood insurance reform legislation signed earlier this year by President Barack Obama, the Federal Emergency Management Agency was granted authority to build a catastrophe reserve fund and to transfer catastrophic risks to the private market through traditional reinsurance or by issuing catastrophe bonds. While the law gives FEMA discretion on whether to explore those options, Congress should insist on a commitment to risk transfer before authorizing the program to borrow even more taxpayer money that it is unlikely ever to repay.
“There has been a revolution in the catastrophe bond market in recent years, as state-run insurance mechanisms like the California Earthquake Authority and Florida’s Citizens Property Insurance Corp. have realized big savings by letting private investors share the risk of catastrophe losses,” Lehmann said. “The NFIP has a great opportunity to take advantage of these developments to both better secure its own finances and avoid the need to call on taxpayers to make up its shortfalls in the future.”