Hurricane Sandy Expected to Max Out FEMA’s Flood Insurance Program

On November 14, Reuters reported that Edward Connor, the deputy associate administrator for federal insurance at the Federal Emergency Management Agency (FEMA) said the agency “is projecting a flurry of flood-related claims in the neighborhood of $6 billion to $12 billion. That is well above FEMA’s current borrowing power, he said, which is maxed out at $2.9 billion.” Should FEMA seek additional funds, they will have to formally request them from Congress, which will have to vote on the measure. The New York Times also picked up the story in an article titled “Flood Insurance, Already Fragile, Faces New Stress” in which the authors predict that the hundreds of thousands of claims brought on by Hurricane Sandy will easily reach $7 billion.

While it may sound like a sure shot that Congress will approve the request for additional funds (nearly half of the Senate supports the aid allocation), The New York Times piece goes into great detail about the arguments for and against additional funding. Supporters claim that property owners deserve compensation for their loss, but opponents say that this is a prime example of throwing money away without addressing the continued reparations for property owners who continue to live in flood-prone areas. They argue that the weather will never stop bombarding storm-prone coastal properties and that our priority should be to impose stricter flood-proofing standards on communities, like raising houses on pilings or adding sand dunes, rather than paying out billions of dollars after repeated disastrous events. The New York Times article also explains what exactly the federal flood insurance program is and does:

“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 areas at higher risk of flooding, an annual policy can cost from $1,200 to $3,000 […] depending on the level of coverage. 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–the year of Hurricanes Katrina, Rita and Wilma–when claims totaled $17.7 billion. Private insurance companies have long avoided offering flood insurance to homeowners.”

The authors of the article add that the agency admits it will never be able to pay back the $18 billion loan it received from the government after Hurricane Katrina. They add, “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 flight paths.” This is more prevalent in areas of Texas or Mississippi than in local communities in New York and New Jersey, which makes a single coherent argument for or against emergency funds nearly impossible.

Critics point to individual properties that are valued under $200,000, but have cost the flood insurance program more than $1.5 million as examples of the waste present under our current system. Others point to the financial and emotional distress that goes along with losing one’s home and possessions and cannot imagine not compensating homeowners for their catastrophic losses. This blog will continue to provide updates about the economic impact of Hurricane Sandy along with news about insurance claims that may result. Check back soon for further updates.