November 14, 2012 — The federal government’s National Flood Insurance Program (NFIP) fell $18 billion into debt after Hurricane Katrina, and is once again running out of money in the wake of Hurricane Sandy insurance claims.

About 115,000 claims have already been filed, and thousands more are being filed every day. It is estimated that the total cost of flood insurance claims will reach $7 billion, which is significantly higher than the $3 billion the NFIP is allowed to add to its debt.

The NFIP collects about $3.5 billion in premiums from about 5.7 million homeowners who live along flood-prone coasts and rivers throughout the United States. Most people pay about $615 a year, but some high-risk homeowners pay up to $3,000 per year for insurance. Unfortunately, in 4 of the last 8 years, costs of the NFIP have exceeded revenue. Government officials have acknowledged that they will never be able to repay the $18 billion bailout after Hurricane Katrina, mostly due to the fact that simply covering the interest consumes up to $750 million per year.

Much of the budget problem is due to the fact that insured properties are repeatedly flooded and rebuilt along low-lying coastal areas or in flood plains with taxpayer money. Some of these coastal communities have resisted entreaties from the Army Corps of Engineers to build sand dunes as a flood barrier because the dunes would block their ocean view.

This is a big reason why most private insurance companies avoid offering flood insurance. However, the federal government pays private insurance companies about $1 billion per year to help sell and service the policies.

Facing a serious budget shortfall, it is possible that the Federal Emergency Management Association (FEMA) will increase premiums by up to 25% for the next five years. This would primarily impact people with vacation homes and investment properties that flood repeatedly, but it could also affect people who live in coastal communities. New rules could also require new, high-risk homes in flood-prone areas to be built elevated above the ground.

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