The National Flood Insurance Program
The National Flood Insurance Program aims to reduce the impact of flooding on private and public structures. It does so by providing affordable insurance to property owners and by encouraging communities to adopt and enforce floodplain management regulations. These efforts help mitigate the effects of flooding on new and improved structures. Overall, the program reduces the socio-economic impact of disasters by promoting the purchase and retention of general risk insurance, but also of flood insurance, specifically.
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Previously reported – December 2018
National Flood Insurance Program: Reauthorization
Congress must periodically renew the NFIP’s statutory authority to operate. On May 31, 2019, the President signed legislation passed by Congress that extends the National Flood Insurance Program’s (NFIP’s) authorization to June 14, 2019. Congress must now reauthorize the NFIP by no later than 11:59 pm on June 14, 2019.
FEMA and Congress have never failed to honor the flood insurance contracts in place with NFIP policyholders. Should the NFIP’s authorization lapse, FEMA would still have authority to ensure the payment of valid claims with available funds. However, FEMA would stop selling and renewing policies for millions of properties in communities across the nation. Nationwide, the National Association of Realtors estimates that a lapse might impact approximately 40,000 home sale closings per month.
NFIP reauthorization is an opportunity for Congress to take bold steps to reduce the complexity of the program and strengthen the NFIP’s financial framework so that the program can continue helping individuals and communities take the critical step of securing flood insurance. The level of damage from the 2017 hurricanes makes it abundantly clear that FEMA needs a holistic plan to ready the Nation for managing the cost of catastrophic flooding under the NFIP.
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Previously reported – February 2019
Private Flood Insurance Gets Boost from Regulators
Flood insurance policies not backed by the government currently represent less than 5% of the residential market
The number of flood insurance policies underwritten by private companies could triple under a new federal rule that would require mortgage lenders to accept both private and government-backed policies.
The rule, approved by the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency late last week, is aimed at boosting the availability of private flood insurance in flood zones, a market dominated by a multibillion-dollar government program. It could usher in private flood insurance for hundreds of thousands of residential properties in those areas, according to government estimates. “This ruling has the potential to open up the private insurance market,” said Michael Barry, a spokesman at the industry-funded Insurance Information Institute. He said the effect was likely to be concentrated in Florida, Louisiana and Texas, where most of the nation’s flood insurance policies are held.
The private-sector insurance industry historically has been reluctant to write flood insurance because of the potential for large losses, but interest has grown in recent years with the improvement of mapping and modeling technologies. Private flood insurance policies currently represent less than 5% of the residential market, according to government and academic research. Most private flood insurance is for commercial and more expensive residential properties that need coverage above the federal program’s $250,000 limit.
The public program had more than five million policies outstanding and $1.3 trillion in potential claims as of July 2018. It is operated by the Federal Emergency Management Agency. “If the private market can take care of it, that’s just more sustainable for taxpayers and for society in general,” said R.J. Lehmann, a senior fellow at the R Street Institute, a libertarian policy organization that has argued for shrinking the government flood insurance program.
The regulation is set to go into effect in July, as the next hurricane season gets under way. It stems from a provision in a 2012 flood insurance law that sought to partially address financial pressures on the government’s flood insurance program, which is deeply in debt from record disaster payouts in recent years and limitations on its ability to increase premiums.
Congress has for years debated how to fix the National Flood Insurance Program, created about 50 years ago because private insurers were unwilling to risk catastrophic flood losses. Lawmakers, divided based on the prevalence of floods in their districts, have approved only partial solutions such as premium increases or debt forgiveness for the government program. The government, for instance, wrote off $16 billion in debt for the federal program in 2017 following claims made in the aftermath of hurricanes Harvey, Irma and Maria.
Congress must reauthorize the federal insurance program this year. It is expected to discuss additional ways to overhaul the federal program, such as redrawing the maps that dictate where coverage is required and making it financially stable.
Opponents of opening up the flood insurance market argue private insurers could cherry-pick safer properties that could be cheaper to insure, saddling the public program with riskier ones. And some lawmakers, including Sen. Robert Menendez (D., N.J.), have called for increasing controls over the private flood insurance sector.
The rule would require lenders to accept private flood insurance policies that have coverage at least as comprehensive as what is offered by the federal program. Banks also could allow policies that aren’t as comprehensive as government flood insurance, a move backed by the insurance industry but opposed by some consumer advocates because it could concentrate riskier insurance policies in the federal plan.
Narrower coverage will “appeal more to lower risk people and then leave the National Flood Insurance Program principally with higher risk people,” said Daniel Schwarz, a professor at University of Minnesota Law School. Three other regulators, including the Federal Reserve, must still approve the rule.
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Previously reported – March 2019
National Flood Insurance Program needs long-term reauthorization to address key challenges
As the House Financial Services Committee meets this week to discuss reauthorizing the National Flood Insurance Program (NFIP), there is a lot at stake. The NFIP, on which 5 million Americans depend for protection from flooding, began with the best of intentions — reducing the burden on federal taxpayers stemming from flood relief while providing resources to help devastated communities rebuild. But as the Nobel Prize-winning economist Milton Friedman was fond of saying, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” Judged by its results, the NFIP is badly in need of serious changes to address its massive debt, persistent operating deficits, and many structural flaws — all of which expose taxpayers to financial risk. With the NFIP’s authorization set to expire in May, Congress has an opportunity to enact real reforms that will put the NFIP on a sustainable, fiscally-responsible footing. Lawmakers should begin to chart a future for the NFIP that addresses its key challenges.
One of the NFIP’s biggest flaws is that it masks the true flood risk of properties by offering a significant portion of its policyholders heavily subsidized rates. One in five homeowners with NFIP protection pay less than half the full cost of their policy. No one begrudges low-income homeowners who need financial assistance to purchase coverage, but most of the NFIP’s subsidies actually go to homes with the highest values. A study by the Congressional Budget Office found that the median value of homes with NFIP coverage is about double that of all American homes. Not only that, but wealthier households tend to get much larger subsidies than middle-income homeowners. Ending these handouts to the wealthy and refocusing resources on the truly needy is essential. Limiting NFIP subsidies would have another positive effect. Currently, by shielding policyholders from the full cost of building in a flood zone, the government encourages more houses to be constructed in disaster-prone areas than if homeowners bore the costs of flooding themselves. Transferring more of the flood risk from federal taxpayers to individual homeowners would cause them to think twice about where to build their home.
But setting risk-based premiums is impossible without accurate flood maps. Many of the 22,000 communities that participate in the NFIP currently rely on outdated and inaccurate flood maps. A recent audit found that only 42 percent of the NFIP’s maps “adequately identified the level of flood risk.” Without better mapping that incorporates improvements in engineering methods and technology, full-risk insurance rates cannot be accurately determined, and homeowners and local policymakers may be misled about the true flood vulnerability of their communities.
Another issue that merits more attention is mitigation. The best way to reduce insurance premiums for homeowners is to lessen the risk of flood loss. Making communities more resilient to flooding before disasters strike by adopting better zoning and building codes and other measures can significantly reduce the cost of cleaning up after floods. Studies have shown that for every $1 invested in mitigation, society saves $6 in rebuilding costs. Overall, so-called “repetitive loss properties,” structures that are damaged and repaired over and over again, account for about 1-2 percent of the NFIP’s total policies but have been responsible for 30 percent of claims since the program began in 1968. One Mississippi home worth $70,000 filed 34 claims with the NFIP from 1978 to 2010 totaling $663,000 — more than 9 times the value of the house. Through more aggressive mitigation incentives, policymakers could reduce this massive drain on the NFIP’s finances.
Congress should also resolve ambiguities in federal law that have limited the growth of private flood insurance; currently, private insurance only makes up 4 percent of the residential market. Greater private-sector involvement in flood insurance would benefit both consumers — many of whom could find lower rates and more flexible options through private carriers — and taxpayers by reducing the NFIP’s financial exposure.
Rather than continue postponing meaningful reforms to the NFIP with short-term stop-gaps, Congress should work over the next several months to craft a long-term solution to the NFIP’s challenges. Without reform, the NFIP’s precarious financial position will only grow worse, to the detriment of taxpayers and homeowners alike.
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House Financial Services Committee Issues Hearing Memo on National Flood Insurance Program
Subject: March 13, 2019, Full Committee Hearing Entitled: “Preparing for the Storm: Reauthorization of the National Flood Insurance Program”
Prior to 1950, flood insurance was a peril often included in standard homeowners’ insurance policies. However, in response to an increasing frequency and severity in flood- related losses in the 1950s, insurance companies began excluding flood insurance coverage and selling it separately. By the 1960s, widespread flooding along the Mississippi River caused most private insurers to flee the business of flood insurance altogether, leaving many consumers with virtually no access to private flood insurance.1 The lack of availability of flood insurance for consumers left them vulnerable in the event of a flood, and also left taxpayers vulnerable to bearing the costs of flood damage through post-disaster relief in the case of a flood event.
In direct response to this private market failure, the National Flood Insurance Program (NFIP) was created in 1968 with the passage of the National Flood Insurance Act (NFIA). In doing so, Congress determined that “as a matter of national policy, a reasonable method of sharing the risk of flood losses is through a program of flood insurance which can complement and encourage preventive and protective measures” and that transferring the costs of private property flood losses from the general taxpayer to individuals in the floodplains through premiums would ease the strain on the nation’s limited disaster resources. Congress also passed the Flood Disaster Protection Act of 1973 (FDPA) that requires most property owners in a designated Special Flood Hazard Area to purchase flood insurance.
The last long-term reauthorization of the NFIP occurred when Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12), which was subsequently amended by the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA). Since the end of fiscal year (FY) 2017, the NFIP has been reauthorized ten times and has experienced brief lapses. According to the National Association of Realtors, an estimated 40,000 home sales are lost or interrupted every month that the NFIP’s authority lapses. The NFIP’s authorization is currently set to expire on May 31, 2019. In the event of a lapse, NFIP will be unable to enter into new flood insurance contracts, which will lead to widespread market instability due to the stalling of mortgage processing for homes that are statutorily required to have flood insurance.
Several Members of Congress have put forward legislative proposals to reauthorize the NFIP and make programmatic reforms to promote affordability, protect policyholders, and improve flood mapping and floodplain management.
Overview of the NFIP
The NFIP is administered by the Federal Emergency Management Agency (FEMA) through its Federal Insurance & Mitigation Administration (FIMA). The NFIP was designed to serve two interrelated goals: (1) provide access to primary flood insurance and (2) reduce flood risk through the adoption of floodplain management standards. The NFIP advances these goals by offering primary flood insurance exclusively for properties in communities that adopt minimum floodplain management standards under FEMA regulations. The NFIP also administers the Community Rating System (CRS), which is a voluntary incentive program that recognizes communities for implementing floodplain management practices that exceed the NFIP’s minimum requirements and, in exchange, FIMA offers reduced flood insurance premiums to policyholders.
Today, the NFIP is the principal provider of primary flood insurance in the U.S., covering over 5 million households and businesses across the country for a total of over $1.3 trillion in flood insurance coverage. As of the end of FY 2018, approximately 22,324 communities participate in the NFIP, covering an estimated 93 percent of the U.S. population. According to FEMA, the NFIP saves the nation an estimated $1.87 billion annually in flood losses avoided because of the NFIP’s building and floodplain management regulations.
In 1983, FEMA created the Write Your Own (WYO) Program in an effort to: increase the NFIP’s policy base and geographic distribution of policies; improve service to NFIP policyholders through infusion of insurance industry knowledge and capacity; and, provide the insurance industry with direct operating experience with flood insurance. This WYO Program operates as a partnership between FEMA and participating property and casualty insurance companies that are compensated to write and service NFIP policies. The WYOs assume none of the risk by participating in this program. FEMA retains all of the insurance risk and underwrites any losses. Currently, approximately 60 different companies administer about 87 percent of NFIP policies through the WYO Program. The remainder of NFIP’s policies are provided through the Direct Program, which is operated by a government contractor and performs the same basic functions as a WYO company.
The NFIP offers a Standard Flood Insurance Policy (SFIP) for properties in participating communities within a Special Flood Hazard Area (SFHA). By virtue of the mandatory purchase required by law, most property owners within the SFHA are required to purchase flood insurance. Many of the SFIP’s policy terms are set in statute. The maximum coverage amount for building coverage is $250,000 for single-family homes, and $500,000 for multi-family residential properties, and non-residential properties including commercial properties. The maximum coverage amount for contents only is $100,000.9 If the SFIP’s maximum coverage amounts are insufficient to cover the full value of the property, policyholders may have the option of obtaining excess flood insurance in the private market.
The NFIP also offers coverage for properties that are not within a SFHA, usually as a Preferred Risk Policy (PRP). PRPs include similar coverage but at discounted rates in accordance with their lower risk profile. If a property has a significant loss history, that policyholder may become ineligible for a PRP and would need to purchase a SFIP that is commensurate with the flood risk.
The NFIP’s Financial Status
The NFIP is largely self-funded through insurance premiums collected from policy holders. Policyholders are also assessed a number of surcharges and other fees. In FY 2018, policyholders paid $382 million in surcharges, $188.162 million in federal policy fees, and $496.82 million in reserve fund assessments. A portion of these premiums, fees, surcharges, and assessments goes towards the cost of flood mapping and floodplain management. A large portion also goes to paying interest on debt of the NFIP.
Congress designed the NFIP as a program that would operate on a cash flow basis, borrowing from the Treasury in bad years and returning funds to the Treasury in good years. The NFIP was largely self-supporting in this way from 1986 until 2005, but due to extraordinary losses incurred as a result of hurricanes Katrina, Rita, and Wilma in 2005, and then Superstorm Sandy in 2012 and Hurricane Matthew in 2016, the program currently carries a debt of $20.5 billion.11 It is also important to note that a significant portion of the NFIP’s debt accrued as a result of Hurricane Katrina ($19 billion) could not possibly have been properly accounted for in NFIP’s risk modeling; specifically, the U.S. Army Corp of Engineers took responsibility for engineering and design failures in the levees that should have been able to provide far better protection for New Orleans in the face of Katrina.
Taxpayers are not on the hook for this debt and receive millions of dollars in interest payments every year (currently approximately $400 million annually or a total of $4.2 billion since 2005) at the expense of policyholders. In 2017, following a proposal submitted by OMB Director Mick Mulvaney, Congress passed legislation to partially forgive $16 billion of the NFIP’s debt of $30.4 billion, after the NFIP’s debt ballooned following Hurricanes Harvey, Irma and Maria and other historic flooding that year.
In 2018, FEMA submitted its congressionally mandated Affordability Framework demonstrating, among other things, that low-income homeowners and renters face significant affordability challenges. The report documents that those that are least able to afford higher premiums tend to live in the highest flood hazard areas writing, “generally, incomes are higher outside the SFHA than they are inside the SFHA. The median household income for residential policyholders is $82,000, although it is substantially lower in the SFHA than outside the SFHA.” Further, FEMA found that “the combination of higher premiums and lower incomes in the SFHA creates affordability pressure on households.”
* Waters_009 is a discussion draft that would reauthorize the NFIP through September 30, 2024 and address a number of affordability issues such as: 1) forgiving the NFIP’s debt; 2) creating a 5-year demonstration for means-tested assistance to low-income policyholders; 3) reducing fees and surcharges; 4) revising the NFIP’s coverage limits; 5) enabling policyholders to pay premiums in monthly installments; and 6) creating a state revolving loan fund modeled after legislation previously introduced by Rep. Crist.
* Maj_Mitigation is a discussion draft that would make several improvements to floodplain management and mitigation such as: 1) raising the amount of funds available under Increased Cost of Compliance program and expanding the eligible mitigation activities to include the cost of acquisitions, among others; 2) granting the Administrator discretion to consider the extent to which communities are working to remedy problems with repeatedly flooded areas when administering mitigation assistance; 3) granting credits for alternative forms of mitigation, allowing coverage for coops and community-based policies; and 5) authorizing and flood plain management activities.
* Maj_Mapping is a discussion draft that would reauthorize the flood mapping program and provide funding to support flood mapping. It would also make several improvements to the mapping program such as: 1) requiring the most up-to-date technology, and more advanced and granular flood maps; 2) improving the process for policyholders and communities to appeal FEMA’s mapping decisions; and 3) creating new flood map zones for levee-impacted and for agricultural areas.
* Velazq_035 is a bill that would make numerous improvements to the claims process drawing on the lessons learned from Superstorm Sandy. The bill would ensure that policyholders better understand the terms of their flood insurance policies and improve the appeals and litigation process for consumers
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Climate Advocates Cheer Trump Policy Shift on Flood Insurance
- Premiums to be based on full flood risk starting in late 2020
- Change expected to raise costs for the most deluge-prone homes
Climate advocates say an overhaul of the nation’s flood insurance program being unveiled by the Trump administration will spur communities around the country to better plan for extreme weather, but could drive up costs for some homeowners.
The changes being announced Monday by the Federal Emergency Management Agency represent one of the most significant reforms in the history of the National Flood Insurance Program. It will tie premiums to the actual flood risk facing individual homes nationwide starting in October 2020. The current system sets prices based largely on whether a home is inside or outside of the 100-year flood plain.
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Trump Administration Plans Flood Insurance Overhaul
Expensive properties could see rate increases under new FEMA plan
The Trump administration said Monday it plans to overhaul government-subsidized flood insurance, in a sweeping proposal that could raise rates on more expensive properties and those in higher-risk areas. The new system would affect policies for most homeowners who own property in flood-prone areas, where such coverage is required because few private companies offer flood insurance. The Federal Emergency Management Agency, which runs the National Flood Insurance Program, said the plan would start assessing properties individually according to several variables—including hurricane rainfall, coastal surges and the distance to a body of water—rather than applying one formula across an entire flood zone when assessing flood risk and contract cost. The government also would factor in the replacement cost of the home, which could push up premiums for homeowners with higher-valued properties and decrease those with lower-cost homes. FEMA plans to announce the new rates on April 1, 2020 and implement them starting Oct. 1 that year. They could affect more than 5 million single-family policyholders of public flood insurance. The NFIP covers both coastal flood zones and inland river flood plains, though the policy change may have a greater impact in coastal states including Florida, Louisiana and Texas, where most of the policies are held.
The changes are likely to stoke a longstanding debate over flood insurance, with policy makers divided over how much the public should subsidize the program. While those in coastal areas have advocated for more federal funding, both environmentalists and fiscal conservatives have argued the program encourages building in risky flood-prone zones. FEMA has increasingly struggled to pay off claims after a series of natural disasters in recent years. The government wrote off $16 billion in debt for the federal program in 2017 following claims made in the aftermath of hurricanes Harvey, Irma and Maria. Scientists say the frequency of such events is influenced by climate change. FEMA’s current system calculates rates based on whether a home falls in a designated flood zone. Since higher-valued properties are more likely to hit the $250,000 insurance cap because they face costlier damages, “there’s an inequity,” said David Maurstad, FEMA’s deputy associate administrator for insurance and mitigation. “Lower-value homes are paying proportionately more than higher-value homes.” “What we’re going to do is change an insurance-rating structure that hasn’t fundamentally been changed since the 1970s,” Mr. Maurstad added. “We’re going to consider more flood risk than we currently do now.” The changes would also leverage new loss-estimation technology, said Mr. Maurstad. In recent years, private insurers have developed increasingly sophisticated models that account for variables including climate change. The agency hopes that a more risk-sensitive pricing could attract more homeowners to purchase flood insurance, even if they aren’t required to. “People even outside the high-risk area will have a better understanding of what the specific risk is,” said Mr. Maurstad. “They will take the responsible action and insure for flood just like they insure for windstorms, hail and fire.”
FEMA faces Congressional restrictions on how much it can increase rates, so the agency could phase in the rate changes, said Mr. Maurstad. It plans to make more details of the plan public in the coming weeks, he added. For years, Congress has debated how to modernize the financially beleaguered flood-insurance program, created about 50 years ago because private insurers were unwilling to risk catastrophic flood losses. Lawmakers are set to reauthorize the federal insurance program this year, after granting a short-term extension in December.
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Vote set on flood insurance extension
Nick Sobczyk, E&E News, May 13, 2019
The House will vote this week to extend the National Flood Insurance Program until the end of the fiscal year, another sign lawmakers have again punted on reform talks. The NFIP expires at the end of the month, and despite months of extra time to reach a deal on a reform package, the measure up for a vote under fast-track procedure this week would be the 11th short-term reauthorization in two years. The measure would extend the program until Sept. 30. There are talks underway on both sides of Capitol Hill, but few signs lawmakers are close to striking a long-term reauthorization deal for a program that advocates say is badly in need of reform. Sen. Bill Cassidy (R-La.) said last week he’s working with Sens. Kirsten Gillibrand (D-N.Y.), Bob Menendez (D-N.J.) and John Kennedy (R-La.) on a reform bill. And House Financial Services Chairwoman Maxine Waters (D-Calif.) has drafted reform proposals and held a hearing on the NFIP to jump-start efforts on the other side of Capitol Hill. Meanwhile, four bipartisan former Federal Emergency Management Agency administrators penned a letter to congressional leaders last week imploring lawmakers to make long-term changes to the program. The group includes Obama-era FEMA chief Craig Fugate and Brock Long, who resigned the post earlier this year. Among other things, they suggest a requirement that sellers disclose flood risk to potential homebuyers and a low-interest loan program to help buy out owners of properties that are repeatedly flooded. Especially in a time when losses from natural disasters and flood events are ballooning, it doesn’t make sense for the federal government to keep paying to rebuild in flood zones, they wrote. “By incentivizing Americans to live in vulnerable areas without taking steps to mitigate the risk, the NFIP gives property owners a false sense of security,” they wrote. “In the absence of reforms, costs in taxpayer dollars and lives lost will only get worse.”