The National Flood Insurance Program (NFIP) was created by Congress in 1968 to fill a void in the market as private companies refused to bear the risk of flood insurance. Since then, the federal government has backed the majority of flood insurance policies in the United States. Although the NFIP is administrated by FEMA, it is not possible for individuals to purchase or renew policies directly with FEMA. Instead, the government relies on private insurance companies to sell and service NFIP policies, receiving nearly one-third of the premiums collected, amounting to nearly $1 billion annually.
Stephen Ellis, president of the watchdog organization Taxpayers for Common Sense, believes that the NFIP should be thoroughly examined due to its poor performance. The program has low participation rates and is deeply in debt, prompting criticism and calls for reform. In recent years, bipartisan lawmakers have proposed legislation to cap the compensation paid to private brokers and allow FEMA to sell policies directly to consumers in effort to improve access to coverage and save taxpayer money.
Despite criticisms of FEMA’s approach to compensating brokers and the lack of transparency and accountability, the agency continues to pay brokers rates higher than those allowed in other government programs such as health insurance and crop insurance. Some lawmakers believe that capping broker compensation rates could reduce costs and help grow the NFIP. An attempt to introduce an NFIP reauthorization act to cap broker compensation rates at 22.46 percent has been made but has not seen significant progress.
Many advocates also argue that FEMA should interact directly with consumers to cut costs and improve access and transparency. FEMA runs a program called NFIP Direct, although it only comprises about 1 in 10 policies, as most agents have minimal incentives to sell these policies as they receive less commission. The industry, however, argues that agent expertise is essential in helping consumers navigate complex topics related to flood insurance.
The debate continues as stakeholders seek to address the challenges facing the NFIP and explore opportunities for reform to foster a more efficient and transparent flood insurance market in the United States.
