The House Committee on Financial Services held its second day of hearings on Wednesday regarding the National Flood Insurance Program (NFIP). NFIP was created by Congress in 1968 because of a lack of appropriate insurance in the public market. The program is administered by the Federal Emergency Management Authority (FEMA) and provides flood insurance to policyholders in the United States and its territories. Insurance agents and companies participate as third-party administrators in the NFIP's Write Your Own (WYO) program and property owners can purchase the insurance only if their communities agree to mitigate flood risks.
The original program was modified in 2012 by the Biggert-Waters Act which sought to increase premiums to more risk-based rates, gradually eliminating government subsidies. The 2014 Grimm-Waters act rolled back many of these reforms.
The Government Accountability Office has estimated that approximately 20 percent of NFIP policies are explicitly subsidized and paying only 35-45 percent of their actual full-risk level premiums and the program has an outstanding debt of $23 billion borrowed from the U.S. Treasury, with $7.425 billion remaining of its total temporary $30.425 billion Treasury borrowing authority. Congressional authorization for NFIP expires September 30, 2017.
The first day of the hearings focused on challenges and opportunities facing the program. Steven Ellis, Vice President, Taxpayers for Common Sense said one of these challenges is adverse selection; the people who purchase flood insurance are those most likely to get a payout. Of 134 million housing units in the country roughly 5.4 percent are covered by flood insurance. While most everyone has a level of flood risk but unless it is acute they don't buy insurance which puts a strain on the program and makes it difficult to charge risk-based rates.
Another issue is subsidies, he said, which have been part of the program virtually from the beginning. While there needs to be a mechanism to provide assistance to lower income ratepayers this assistance should be outside of the rate structure so as to not mask risk.
He also noted that the Special Flood Hazard Area maps used by FEMA to delineate the area in which mortgaged homeowners are required to purchase insurance are not necessarily accurate and lack of confidence in their accuracy hobbles FEMA's implementation of the program.
Tom Wood, Chairman of the National Association of Home Builders focused his testimony on the flood maps issues saying that in order to be accurate they must take into account all flood control efforts like levees and dams. In many cases, he said, FEMA has failed to factor in privately funded flood control or any structures not built by the Army Corps of Engineers. This has resulted in many properties being mapped into higher rate zones.
In addition to correcting these problems Wood said the NFIP must continue to allow state and local governments to shape local land use policies and make decisions on how private property may be used. If a local government deems an area fit for residential building, flood insurance and mitigation standards allow homebuyers and homeowners the opportunity to live in a home of their choice in a location of their choice, even when the home lies in or near a floodplain.
Christopher Heidrick, representing the Independent Insurance Agents & Brokers of America, said that the recent short term reauthorizations of NFIP rather than the historic multiple year renewals have created instability and uncertainty which can lead to concrete damages in the real estate and development market as well as the country's economy overall. The threat of expiration requires agents to repeatedly work with consumers notifying them of the pending expirations and their ramifications while realtors and mortgage lenders have to decide how to proceed with property sales and issuing and servicing mortgages that require flood insurance.
Speaking on behalf of the Property Casualty Insurers Association of American, Patty Templeton-Jones, Vice President of Wright National Flood Insurance Company said that, without question, the biggest change in flood insurance since the last Congressional authorization of the program is that private capital is actively interested in writing policies. In response, state insurance regulators, she specifically named Florida and Pennsylvania, are engaging insurers with the intent of fully incorporating flood insurance into their states insurance regulation system.
Templeton-Jones urged Congress to develop consensus on long-term reforms well before the program's 2017 expiration date. This, she said, is the single most important thing Congress can do to foster certainty in the flood insurance marketplace and encourage the continued development of market-oriented solutions in flood risk management.
Wednesday's hearing focused on ways in which to create a robust private flood insurance market. Birny Birnbaum, Executive Director of the Center of Economic Justice told committee members that the invitation to testify asks whether NFIP represents the ideal model for protecting residential and commercial property owners from damages related to flooding. The answer he said is a resounding no. Congress has tasked the program with too many multiple and conflicting goals and placed on it too many constraints and requirements. It is tasked in whole or part with:
- Providing insurance coverage to individual homeowners and business for the peril of flood as an alternative to disaster relief;
- Promoting the sale of flood insurance with broadly-subsidized rates;
- Removing subsidies and moving to risk-based or "actuarial" pricing;
- Addressing repetitive claims for properties in high-risk areas;
- Addressing problems of affordability of flood insurance
- Identifying and mapping flood risk through an interactive process with local governments;
- Paying back past flood insurance losses that greatly exceeded revenues collected; and
- Promoting flood loss mitigation and prevention
With such varied and conflicting responsibilities and limitations, it is not surprising that the NFIP has been a poor flood insurance program, he said.
The very first step for Congress should be to establish the goal for federal expenditures for disaster relief and loss mitigation related to flood the promotion of more resilient and sustainable homes, businesses, communities and infrastructure against the peril of flood. With this as the clear goal, then any proposals regarding the NFIP can be evaluated by asking - does this change promote resiliency and sustainability or not?
Steven Bradshaw, Executive Vice President of Standard Mortgage Corporation, speaking on behalf of the Mortgage Bankers Association (MBA), said there is no question but what the flood program needs to be reformed and that expanding insurance options will make it easier for more homeowners to obtain insurance at lower cost and increase the number of at-risk properties with coverage.
"For example," he said, "many homes that were destroyed by Hurricane Katrina were not located in a special flood hazard area. Homes outside of those zones are not required to have flood insurance. As a result, mortgage servicers were liable for the costs when those homes were wiped out." MBA, he said, believes that involving the private sector will also shift some of the burden of post-disaster recovery away from the federal government, limiting taxpayer exposure to future flood losses.
MBA, he said, supports H.R. 2901, the Flood Insurance Market Parity and Modernization Act which clarifies what constitutes an acceptable private flood insurance policy and addresses lenders' concerns regarding continuous coverage requirements. Under current law, it is unclear whether someone previously covered under an NFIP policy who moves to a private carrier would be eligible to return to the NFIP policy at their previous rate.
Teresa D. Miller, Commissioner of the Pennsylvania Insurance Department and speaking for the National Association of Insurance Commissioners, said there is a growing appetite in the surplus lines market, which typically insure unique or other difficult to underwrite risks, to provide private flood insurance coverage. Surplus lines are often the first to develop and offer new types of coverage then after proving itself profitable the coverage tends to become a standard market product. She said at least five surplus lines carriers sold flood insurance to homeowners in Pennsylvania in 2015, and have written nearly 1,000 policies. Licensed insurers have also started to write coverage but only in very limited markets. Also Pennsylvania is finding in many cases that private carriers are willing to offer comparable coverage at substantially lower cost than the NFIP.
Brady Kelley, Executive Direction of the National Association of Professional Surplus Lines Offices (NAPSLO) said his organization believes the private market will develop, but slowly. "For consumers whose flood risks are mitigated by the terms and limits available from the NFIP, there will be no real change or shift of NFIP coverages to the private market. As long as the NFIP continues to subsidize rates and delay the implementation of more actuarially sound rates commensurate with underlying exposures, there is no incentive for consumers to seek private market solutions and no incentive for the private market to develop solutions that cannot compete."