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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2018

Key Insurance Pool Needs More Than A Life Preserver

Congress should permanently fix the broken National Flood Insurance Program

Key Insurance Pool Needs More Than A Life Preserver

Fifty years ago, Congress created the National Flood Insurance Program in the aftermath of Hurricane Betsy, a monster storm that killed 76 people and flooded more than 164,000 homes in New Orleans. Since then, the program has provided flood insurance to homeowners and businesses where a private market did not exist.

The program is broken, however. It’s in debt, and there doesn’t seem to be any help on the way. Congress needs to make a long-term fix. Doing so will not only protect covered properties in flood-prone areas, but will help stabilize a market for mortgage originators and others in the real estate industry.


Key Points

Reforms needed for National Flood Insurance Program
  • Make repetitive loss properties a priority.
  • Require mitigation on every flooded property.
  • Open up flood insurance to private insurers.
  • FEMA should update flood maps quickly.
  • Gradually right-size rates in flood-prone areas.
  • Run the National Flood Insurance Program as a business.

The goal of the National Flood Insurance Program (NFIP) is to reduce rising emergency disaster-relief payouts, map the flood risk of the entire country and cut down the risk of floods by working with communities on proactive flood-plain management.

Until 2005, the NFIP was largely self-sustaining, but Hurricane Katrina and a series of other hurricanes and storms have left the program nearly $20.5 billion in debt, and that’s before Hurricane Florence hit the Carolinas.

Last fall, Congress forgave $16 billion in NFIP debt. NFIP’s fiscal lifeline has been extended by its overseers more than 75 times during its existence, including 41 times in the past 20 years. It’s due up for another congressional reauthorization later this year, on Nov. 30.

The program needs a long-term reauthorization to protect the vulnerable, improve the program’s financial soundness and promote private-market competition in the flood insurance market. Following are some common-sense reforms that Congress should consider.

Repetitive loss

Flood insurance doesn’t prevent flooding. The mandate to buy flood insurance and the price of the premium demonstrates and quantifies a property’s flood risk. 

Claims payments can help homeowners rebuild after a flood, but only mitigation and floodplain management can help prevent flooding. The NFIP should provide premium discounts for private- and community-based mitigation efforts and require some level of mitigation on every property that receives a claim payment.

It’s important to consider the rebuilding process as a whole in order to achieve a different result the next time a flood occurs. This may mean instituting new elevations, improving building codes, fortifying homes and relocating people out of harm’s way.

Congress should right-size rates with a gradual phase-in and provide explicit subsidies for those who can’t afford increases.

Of the nearly 5.1 million NFIP policies in force, 88 percent have never had a claim payment and 2.87 percent (or almost 145,000) have had two or more claims. Less than 0.3 percent of all policies (or about 13,000) are deemed “severe repetitive-loss” properties, according to the U. S. House of Representatives Financial Services Committee.

While they are a small percentage of all flood-insurance policies, repetitive-loss properties should be a top priority in NFIP reform. That’s not just because 1 percent of the policies make 25 to 30 percent of flood claims, but also because the residents of these properties are in danger.

More than 115 people perished from flooding-related events last year, and more than 550 have been killed since the Biggert-Waters Flood Insurance Reform Act passed Congress in 2012. According to a 2017 study by the Natural Resources Defense Council, only 5,961 of 30,000 severe repetitive-loss properties received some form of federal assistance to mitigate against future flood damage (usually elevating the structure), and only 2,601 of those received buyouts.

Congress should expand grant programs for individual and community-level mitigation. In addition, the Federal Emergency Management Agency (FEMA) should work with mortgage lenders to help severe repetitive-loss property owners pay off their loans and relocate to higher ground.

Opening the flood-insurance market to private insurers also makes good business sense. If homeowners can obtain better, cheaper flood insurance from a private insurance company, then the government shouldn’t stand in their way.

If the product or service isn’t better, consumers should be allowed to return to the NFIP and have their coverage considered continuous without penalty. The Flood Insurance Market Parity and Modernization Act, introduced in both the U.S. House and Senate, addresses this issue by allowing flood insurance from the private market to satisfy the mandatory purchase requirement.

This is bipartisan, common-sense, pro-consumer legislation that clarifies the intent of the 2012 Biggert-Waters Act, which says private flood-insurance policies should be allowed to satisfy mandatory-purchase requirements for federally mandated flood insurance. This bill also would ease administrative burdens for homeowners and business owners who need coverage above the NFIP policy limits and currently need to get a base layer of coverage through the NFIP and additional coverage from private carriers.

Right-size rates

Mortgage lenders are often the ones who have to explain to borrowers that their property is in a flood zone and why flood insurance is mandated by the federal government — to protect the homeowner and the lender because the property serves as collateral on the loan. Enforcing this mandatory-purchase requirement can be like trying to hit a moving target, however because of the lengthy process involved in updating the FEMA flood maps.

FEMA should finish its efforts to accurately identify risk as quickly as possible. It also should accept maps that are commissioned by private entities and communities, especially when FEMA maps are delayed.

Regulators also should recognize lenders’ good-faith efforts and the difficulties of hitting this moving target when examining financial institutions for compliance.

One cannot talk about NFIP reform without talking about “actuarial rates,” which use statistics and historical information to calculate risk as accurately as possible. If the Biggert-Waters Act showed us anything, it is that the rates the NFIP is charging are drastically below actuarial requirements.

Biggert-Waters attempted to meaningfully reform the NFIP by gradually bringing rates up to reflect true risk, making them actuarially sound. But soon after the passage of Biggert-Waters, reports surfaced of flood-insurance premiums rising thousands of dollars, driving people from their homes and bringing real estate transactions in flood zones to a grinding halt.

In response, Congress quickly acted to reverse premium increases. The intent of Biggert-Waters’ premium increases was pure — to make the program sustainable long-term and to show homeowners their true flood risk. To effectively address inadequate rates and set the program on a course toward self-sustainability, Congress should right-size rates with a gradual phase-in and provide explicit subsidies for those who can’t afford increases.

One measure that would help achieve this goal passed the House this past summer and would change how flood-insurance rates are set by using the replacement value of the home instead of a national average that includes the value of the land. This change would cause rates to rise for higher-value homes while rates on lower-value homes would decrease. 

The NFIP has taken some important steps in the last few years to run the program more like a real insurance company. In 2012, the NFIP started building a reserve fund for catastrophic losses. In 2017, the NFIP made its first reinsurance purchase to spread the risk among multiple insurers. It paid out as planned.

So far this year, the NFIP purchased more reinsurance and issued its first catastrophe bond. These are critical tools used by insurance companies to responsibly spread their risk. The NFIP should continue this trend of exploring risk-transfer methods.

•  •  •

More can be done to fix the broken NFIP. Unfortunately, negotiations in Congress have stalled this year, with little hope for long-term reform expected ahead of the Nov. 30 program reauthorization deadline.

Legislators on both sides of the aisle need to sit down and hash out a short list of reforms that Congress can pass to help

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