The National Flood Insurance Program: Factors Affecting Actuarial Soundness
"The vast majority of homes and small commercial buildings that are insured against flood
damage in the United States are covered by the National Flood Insurance Program (NFIP),
which is administered by the Federal Emergency Management Agency (FEMA) in the
Department of Homeland Security. Although the flood insurance program had been largely
self-sustaining in the past, it had to borrow about $17 billion from the federal Treasury to pay
claims after the catastrophic hurricanes of 2005. That borrowing has highlighted questions
about the program’s financial health, including the actuarial soundness of the premium rates
charged on policies that are not explicitly subsidized and the cost of paying claims for properties that have suffered multiple flood losses.

This Congressional Budget Office (CBO) paper—prepared at the request of the Ranking
Member of the Senate Committee on Banking, Housing, and Urban Affairs—explains how
FEMA sets “full-risk” (actuarially based) premium rates for the flood insurance program. The
paper then discusses various reasons for concern that those rates may not be adequate to cover
the total expected costs associated with the program’s full-risk policies. The report also
addresses other aspects of the NFIP, including the impact of insured properties that have
flooded more than once and the U.S. market for flood insurance from private companies. In
keeping with CBO’s mandate to provide objective, impartial analysis, this report makes no
recommendations..."