Hurricane Florence is the latest setback to struggling flood insurance program

Hurricane Florence is poised to bring flooding and destruction to thousands of homes in the Carolinas and Virginia, and another blow to the federal program meant to insure homeowners and businesses against flood damage.

Most private insurance policies don't protect against damage from floods caused by rain, overflowing rivers or storm surge. For that damage, the National Flood Insurance Program, which is run by FEMA, provides most of the coverage.

The cost of claims is supposed to be covered by the premiums paid by policyholders. But attempts by Congress to raise premiums enough to cover actual damages caused an outcry from those living in flood zones. That prompted Congress to back off plans to raise rates and place limits how much premiums can be increased. And that only added to massive losses in the program.

Last year with hurricanes Harvey, Irma and Maria, the program paid out $8.7 billion to policyholders, the third highest total in the program's history.

The payments would have pushed the program's finances past its borrowing limits, but Congress forgave $16 billion the program owed the federal government to allow it to pay out the claims. The move received virtually no press coverage, despite the price tag.

"It's damn near impossible for the program not to lose money," said Craig Fugate, the head of FEMA during the Obama administration. "It's been what everybody hopes for but the reality is since you only have mandatory purchases if you live in a [flood zone], you're insuring the highest risk with the least amount of premiums."

Fugate said there should be more attention given to the losses in the program, including last year's debt forgiveness.

"They wrote off $16 billion and no one raised an eyebrow," he said. "That $16 billion could have gone to Pell grants, cancer research, helping to treat veterans."

Hurricane Florence, which is forecast to dump huge amounts of rain as it moves inland, is only going to put new pressure on the already strapped program.

There are 444,000 flood insurance policies in North Carolina, South Carolina and Virginia, the three states expected to take the brunt of the storm. They have a total of $115 billion in flood insurance coverage between them.

Only a fraction of those policies will file claims after the storm, but even if the flood insurance program pays out 5% of the policies' limits, that comes to nearly $6 billion. And $6 billion in claims would be more than the program paid out over the four years between 2013 and 2016.

Claims reaching $6 billion are a real possibility said Chuck Watson, an analyst with the disaster research group Enki Research.

He said the storm surge alone could prompt between $2 billion to $3 billion in claims, since the homes in coastal communities are more likely to have policies in place. An additional $2 billion to $3 billion in claims could come from inland flooding caused by rain and rising rivers.

Watson cautioned it could cost the program far more than that, depending on how the storm develops.

"Flood losses are predictable if we know what the rain fall is," said Watson. "The question is how long Florence will be around, will it stall, and how much inland rain we will get."

Homeowners with federally-backed mortgages who live in areas judged to be at risk of flooding are required to have flood insurance as a condition of their closing on the loan. But coverage is relatively rare for those who live outside those areas, even though many homes outside of those zones sustain flood damage.

Watson and Fugate both say part of the problem is that current premiums don't accurately reflect the risks, and even encourage people to build in areas susceptible to flooding. If Congress doesn't want to hit existing homeowners with huge premium increases that make their homes unaffordable, it could at least prohibit policies on new construction in the flood zones, Fugate said.

Watson said that the flood maps need to be adjusted to more accurately reflect the risk of flooding, which would force more people to get policies and help increase premium revenue for the program. Many of the homes that sustain flood damage every year lie outside of designated flood zones, which causes massive uninsured losses. Flood damage from this storm could easily be double what is covered by existing flood policies.

"The flood zone delineations are just wrong," said Watson. "But communities don't like expansion flood zone, because it makes development more expensive and difficult. So the flood zones really don't reflect the risk."

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