The National Flood Insurance Program (NFIP) has announced several reforms after increased criticism over their lengthy claims process. Policyholders are being underpaid for claims, while private insurers are gaining millions from the NFIP program. Meanwhile, flood victims still haven’t been able to return home.

Flood Insurance Explained

What does the NFIP do? Working together with around 80 private insurance companies, the NFIP provides citizens much needed flood coverage. Before the NFIP was created under the Federal Emergency Management Agency (FEMA), flood insurance was hard to find.

Few private insurers would offer flood policies after the 1927 Mississippi River floods. According to the Insurance Journal, if the same flood occurred today, it would cause $160 billion in damages.

Beyond being expensive, floods also happen surprisingly often. In fact, they’re the most common natural disaster in the United States.

Unfortunately, standard homeowners insurance doesn’t offer flood coverage. It’s recommended you buy it even if you aren’t in a high-risk zone. After all, according to NFIP, a six-inch flood can cause $40,000 in damage to a 2,000-square-foot home.

Find out more about flood insurance in our article What You Need to Know About Flood Insurance.

Problems with the NFIP

The NFIP has provided flood insurance for renters and homeowners for over 40 years. Despite this—as people who lost their homes to Hurricane Sandy know—the program is less than perfect.

Although private insurers issue the flood policies, they don’t need to worry about any risks when insuring a customer. Rather, the NFIP pays for any losses. Providers only pay to “service” the policies.

According to NPR, insurance companies make an almost 30 percent profit after a flood disaster. After Hurricane Sandy, private insurers walked away with $400 million dollars in profit. And even though Sandy happened three years ago, people who took out the maximum flood coverage are still struggling after receiving underpaid claims.  

NPR recently reported that FEMA found insurance companies underpaid 80 percent of homeowners. Another story from USA Today in late April stated a former FEMA contractor was told to deny or underpay flood insurance claims.

But providers don’t have much of an incentive when it comes to paying homeowners. If someone complains to FEMA about a claim, the appeal is sent to the insurance company to handle. And if someone sues the insurance company, the NFIP covers all legal costs.

Flood Insurance Reforms

Clearly, the program is in need of a change. Although it has undergone changes in the past, these recent reforms are the largest in 17 years.

Roy Wright took over the NFIP about 10 months ago. Wright, for his part, wants to make transparency number one.

"…Everyone can see what we’re doing and where we are going,” he said. “This is part of how, I am convinced, we will be able to restore credibility.”

How is Wright planning to overhaul the program? For one, NPR reports FEMA is tackling many people’s complaints about high profit margins. They are re-evaluating the insurance companies’ profit structure to try to fix this concern.

Other changes to the program include:

  • Changing the appeals process on flood claims
  • Rewriting contracts between FEMA and private insurance companies to increase oversight
  • Altering the process for FEMA to pay the legal fees of private insurers. Legal fees will now be overseen by an oversight team

"As we go forward, there will be FEMA lawyers, rather than outside counsel, that are making the final decisions about our litigation strategies," Wright said in a recent NPR article.

Others aren’t satisfied with these reforms saying it’s “too little, too late.” People like New Jersey Senator Bob Menendez are calling for NFIP to disband entirely. As the New Jersey senator, Menendez represents many of the people most affected by Hurricane Sandy.

"This is a federal program at the end of the day," he told NPR last month. "It needs to fundamentally transform. And if it cannot do so on its own, then we have to consider legislatively whether we scrap the entire model."