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Next time a disaster sends water flooding into the homes of Americans, the insurance system that protects some of them, the National Flood Insurance Program (NFIP), might not have the money to fill their claims. The NFIP covers areas that private insurers do not want to take the risk of insuring, including the New Orleans floodplain; when Hurricane Katrina hit, the damage was so great that it wiped out NFIP’s funds. The program typically had paid under $2 billion a year to flood victims using the insurance premiums it collects. But claims from Hurricane Katrina alone exceeded $16.3 billion. NFIP could not cover those losses on its own and had to rely on a boost from the Treasury. “The program has been unable to set aside sufficient funds to meet future expected losses,” the Government Accountability Office (GAO) warned in 2008. As of December 2007, the Federal Emergency Management Agency, which oversees NFIP, still owed $17.3 billion against the loans it took from the Treasury to cover losses in the 2005 hurricane season — and that number is growing. For many years, incoming premiums and claims paid tracked fairly closely, but the GAO found that the program’s budgeting method was inadequate to account for the level of risk faced by the NFIP. Congress is working on legislation to forgive the NFIP’s debt and reform the program, but for now the NFIP must bank on updated zoning requirements, like those in New Orleans that require many houses to be elevated on stilts or walls, to keep the program’s risk under control. Without reform, the program could lead to another multibillion dollar rescue plan shouldered by American taxpayers.

Unable to come complete reform legislation in 2008, in September Congress reauthorized the NFIP until March 6, 2009. A FEMA spokesman told the Center that any real change to the NFIP would have to come from Congress, but that it’s unlikely the program will take in enough income from premiums to cover catastrophic losses like those seen in Katrina. “Making the program ‘actuarially sound’ would outprice most policyholders and therefore be counter-productive to Congress’ original intent,” he said. “And this has been debated for years — even before the 2005 catastrophic loss year.”

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