WASHINGTON — Early estimates suggest that Hurricane Sandy will rank as the nation’s second-worst storm for claims paid out by the National Flood Insurance Program. With 115,000 new claims submitted and thousands more being filed each day, the cost could reach $7 billion at a time when the program is allowed, by law, to add only $3 billion to its onerous debt.
Hurricane Katrina caused it to fall $18 billion into debt.
Just this summer, Congress overhauled the flawed program by allowing large increases in premiums paid by vacation home owners and those repeatedly hit by floods. But critics say taxpayer money should not be used to bail it out again — essentially subsidizing the rebuilding of homes in risky areas — without Congress mandating more radical changes.
“We are now just throwing money to support something that is going to end up creating more victims and costing more money in the future,” Rep. Earl Blumenauer, D-Ore., said of the program, which insures 5.7 million homes.
Even with the new rules, critics argue, it will be many years, if ever, before many homeowners are required to pay premiums that accurately reflect the market cost of the coverage.
Some communities have long resisted imposing more appropriate building codes to prevent damage, putting the program at further risk of devastating losses when big storms hit. And despite some efforts in recent years, many of the flood maps the program relies on are out of date.
The program’s giant debt makes matters worse because simply covering the interest owed the Treasury consumes from $90 million to $750 million a year, depending on rates. This means it is much harder to build reserves.
But others on Capitol Hill argue that the changes adopted in July are an important first step, and that Congress must give the Federal Emergency Management Agency, which runs the program, a chance to apply them before additional changes are considered.
Already, 44 members of the House of Representatives have called for Congress to appropriate whatever money is needed to help victims recover from Hurricane Sandy, and aides on Capitol Hill say that under such extreme losses, they expect lawmakers will do what they have to do to keep the program solvent — even amid a federal budget crisis.
“It is a program we require people to participate in, so we have to make sure it is adequately funded to handle claims,” said Rep. Timothy H. Bishop, D-N.Y., whose district in Long Island has more than 100 miles of coastline. “You can’t say: ‘Awfully sorry. Hope this works out for you.’ ”
The insurance is mandatory for homeowners with a federally backed mortgage if they live in an area subject to flooding at least once every 100 years. The average annual flood insurance premium is about $615, but for homeowners in high-risk areas, an annual policy can cost from $1,200 to $3,000, according to Steve Harty, president of National Flood Services, a claims-processing company.
The federal program collects about $3.5 billion in annual premiums. But in four of the past eight years, claims will have eclipsed premiums, most glaringly in 2005, when Hurricanes Katrina, Rita and Wilma all hit. Claims totaled $17.7 billion that year.
Private insurance companies have long avoided offering flood insurance to homeowners.
“It’s like rat poison to them,” said Tony Bullock, an insurance industry lobbyist, explaining how the risk outweighs the benefit. “You need the federal backstop.”
But the program is still a moneymaker for the private insurance industry. Even though these companies bear none of the risk, they take, on average, $1 billion a year of the premiums the government collects, as compensation for help in selling and servicing the policies. Federal auditors argue the payments are excessive, and many lawmakers agree.
More than 1 million property owners who live in homes at least four decades old have historically paid only about 40 percent of the estimated true cost of the coverage the government provides — in large part because of lobbying by the real estate industry, mortgage brokers, homeowners associations and other groups.
Perhaps the most troubling problem, program officials acknowledge, is that only a tiny share of enrolled properties account for a giant share of the overall claims, as the properties are repeatedly flooded and rebuilt in low coastal regions and in hurricane paths.
One Biloxi, Miss., property valued at $183,000 flooded 15 times over a decade, costing the program $1.47 million, according to federal data provided by the agency to a member of Congress. Another in Humble, Texas, has resulted in more than $2 million in flood payouts even though it was worth $116,000.
An analysis of two decades of claims by the Wharton Risk Center at the University of Pennsylvania shows that certain states, like Texas, pay much less in insurance premiums than the homeowners there collect in damage claims, evidence of the inherent inequity in the national program.
