Background
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. 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.
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. 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.
Affordability Challenges
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.”
Draft Legislation
- 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
Witnesses
Panel one
- Rep. Sean P. Duffy
- Rep. Garret Graves
- Rep. Blaine Luetkemeyer
- Rep. Frank Pallone
- Rep. Bill
Pascrell
- Rep. Steve Scalise
Panel two
- Maria Cox
Lamm,
South Carolina Department of Natural Resources, on behalf of
Association of State Flood Plain Managers
- Christopher
Heidrick,
Heidrick & Company Insurance and Risk Management Services,
LLC, on behalf of Independent Insurance
Agents and Brokers of America
- Velma
Smith,
Senior Officer, Government Relations, The Pew Charitable Trusts
- Mabél
Guzmán,
Broker, @properties, on behalf of National Association of Realtors
- Collin
O’Mara,
President and Chief Executive Officer, National Wildlife Federation,
on behalf of SmarterSafer Coalition
- Raymond J.
Lehmann,
Director of Finance, Insurance and Trade Policy, R Street Institute
House Financial Services Committee
2128 Rayburn
03/13/2019 at 10:00AM