The National Flood Insurance Program - Time to Get Fixed

The National Flood Insurance Program - Time to Get Fixed

January 22, 2009 08:48
by J. Wylie Donald

Well, we have a new President and a new Congress.  Mr. Obama mentioned climate change a few times in his inaugural address.  When he gets down to the nitty-gritty, let’s hope he can get something done.  Like fix the National Flood Insurance Program (NFIP). 

The National Flood Insurance Program is mired in debt to the tune of more than $17 billion.  A bill that would have forgiven that debt and provided for future solvency of the NFIP passed through both houses of Congress with bipartisan support in 2008, but died in conference when the 110th Congress adjourned for the last time.  The Flood Insurance Reform and Modernization Act of 2007 would have ended federal subsidization of many flood insurance policies by phasing in risk-based premiums.  The bill would also require more homeowners to purchase flood insurance.

The bill was first proposed in the wake of the catastrophic 2005 Gulf hurricanes, and its most recent version hung on in Congress for more than a year while the NFIP’s debt continued to rise.  Interest payments alone on the NFIP’s debt amount to more than $1 billion annually.  Neither Midwestern flooding nor Hurricane Ike, however, were sufficient to motivate the House and Senate to reach an agreement on the future of federal flood insurance.  The new Congress will have tough choices to make about how flood insurance premiums should be calculated, who should be required to purchase coverage, and whether optional insurance products should be offered through the NFIP.

Current NFIP rates are set based on national averages.  Both the House and Senate versions of the flood insurance bill would have eliminated federal subsidies for many flood insurance policies by phasing in actuarial risk-based policy premiums.  Because many of these policies are heavily subsidized, the phase-in would result in steep premium increases for affected homeowners and businesses.  The pace of these increases was a point of contention in debate over the bill, with the House voting for a modest, gradual phase-in of actuarial rates and the Senate voting for a more aggressive phase-in designed to quickly generate premiums sufficient to cover claims.

While risk-based premium pricing is likely to lead to flood insurance rate increases for many of the NFIP’s 5.5 million customers, some homeowners and businesses will see a decrease in their flood insurance premiums.  A recent Government Accountability Office (GAO) audit of the last thirty years of NFIP data shows that Florida residents have paid almost $10 billion more in flood insurance premiums than they have collected in flood insurance benefits.  Other Gulf-state residents have collected more in flood insurance benefits than they have paid into the program.  Recent heavy river flooding has led to more benefits being paid than premiums collected in states like West Virginia and Missouri.  Risk-based NFIP premium pricing would address these regional disparities.

The question of who will be required to purchase flood insurance is a sticking point on which lawmakers will continue to struggle as they move forward with flood insurance reform.  Both the House and Senate versions of the flood insurance bill would have mandated flood insurance coverage in the 100-year flood plain and in areas located behind levees and dams, even those certified by the Army Corps of Engineers.  Several members of Congress expressed concern about imposing a blanket coverage requirement without factoring in the actual risk of individual levees and dams failing.

Another major point of contention in debate over the flood insurance bill stems from a proposal to add optional, actuarially-priced multiperil coverage to the NFIP.  Proponents of the measure argued that increasingly severe storms call for policies that cover damage caused by either windstorm or flooding, without requiring a determination as to whether wind or flooding caused the damage.  These multiperil policies would alleviate the problem faced by many policyholders after Hurricane Katrina when their claims were denied on the basis of anti-concurrent causation clauses that worked to exclude claims for a covered event (wind) when a non-covered event (flooding) occurred concurrently.  See Tuepker v. State Farm Fire & Cas. Co., 507 F.3d 346 (5th Cir. 2007) (reversing trial court and upholding anti-concurrent causation clause).  Given the proposed risk-based policy pricing, proponents of adding multiperil coverage to the NFIP argue that these optional policies won’t increase the program’s cost.  Opponents argue that adding coverage to a program currently operating more than $17 billion in the red would be financially irresponsible.

One aspect of NFIP modernization that lawmakers appear to agree on is the need for the Federal Emergency Management Agency (FEMA) to revise the floodplain maps used to determine NFIP policy pricing and coverage requirements.  Both the House and Senate versions of the flood insurance bill appropriated funding to update floodplain maps.  FEMA lags behind private insurers in that it has not yet begun to factor climate change into its mapping process.  The House version of the flood insurance bill was passed with an amendment that would have required FEMA to use the latest climate science in updating its floodplain maps. 

This mapping issue, and the questions of how to set rates, for whom to mandate coverage and what types of coverage to offer, are all waiting for the 111th Congress and the 44th President.  They need to hurry, the Tropical Meteorology Project at Colorado State University predicts an above-average Atlantic hurricane season.

I thank Rebecca Brenia for her help in researching and writing this post.

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