July | August 2017







Federal Flood Insurance Program $25 Billion in Debt

By Leslie Haymon, policy analyst, CSG Washington, D.C., office
After a decade-long series of catastrophic flood events, from Hurricanes Katrina and Irene to severe storm-related flooding in Texas and Louisiana, the National Flood Insurance Program, or NFIP, is almost $25 billion in debt and lawmakers are looking to make changes to the program’s design. Proposals to ensure long-term financial solvency include raising premiums, allowing private insurers to enter the market, new and more accurate flood mapping, and encouraging communities and homeowners to undertake additional disaster mitigation efforts.
The NFIP, initially created in 1968, provides homeowners and small business owners with federally guaranteed flood insurance. Designed to offset the disaster relief costs incurred by taxpayers and the disintegration of the private flood insurance market, the program’s authorization expires on Sept. 30, 2017. 
“The National Flood Insurance Program has provided peace of mind and economic security to millions of American families and property owners for nearly five decades,” said U.S. Rep. Charlie Crist, a member of the House Financial Services Committee.
The NFIP, in conjunction with the Federal Emergency Management Agency, identifies flood risk, offers affordable insurance policies and encourages community flood plain management. In support of these objectives, the Federal Emergency Management Agency engages in extensive flood mapping, with input from both state and local governments and the private sector. These maps provide the basis for setting insurance rates and pinpointing properties whose owners must purchase insurance.
Due to severe flood events in recent years, the NFIP is now facing several large claims. As a recent report in The Washington Post highlighted, some properties covered under this program have been declared total losses repeatedly. This combined with changing building patterns that encourage more waterfront structures and the growing risk of extreme weather events reiterate the urgent challenges facing this program. Lawmakers are exploring a number of potential solutions to solve the NFIP’s debt problem and restore the program to long-term health.
The National Emergency Management Association, or NEMA, released a position paper in March reiterating the importance of federally-backed flood insurance in both disaster recovery and risk mitigation.
“The National Flood Insurance Program plays a significant role in the disaster recovery and mitigation cycle across the nation and reauthorization is a priority for the emergency management community. Uninsured risk is a burden on communities and stresses local, state and federal disaster recovery budgets, so a robust insurance structure that promotes risk reduction is in everyone’s best interests,” said Wendy Smith-Reeve, NEMA president and director of the Arizona Division of Emergency Management. NEMA is an affiliate organization of The Council of State Governments.
In the House, the Financial Services Committee reported out a series of bills in June that focus on lowering flood insurance premiums, encouraging flood mitigation practices, and modernizing flood mapping while reauthorizing the program for five years. The bills comprising this comprehensive package are:
Many were noncontroversial and passed unanimously, including bipartisan efforts to require communities in the program with a high number of repeatedly flooded properties to develop plans to mitigate that risk, assist policyholders challenging claim denials, and allow certain private insurance policies to meet the flood insurance mandate, provided the policies meet certain conditions.
However, other bills were more controversial. H.R. 2246, the Taxpayer Exposure Mitigation Act of 2017, repeals the flood insurance mandate for commercial properties, allowing business owners to purchase private plans, and includes a provision encouraging risk transfer from the NFIP to capital markets. Importantly, it also includes a provision permitting state and local governments to develop their own flood maps. H.R. 2565 would amend the program to require the use of replacement cost value in setting premium rates. Both measures passed on party line votes.
H.R. 2874, which contains the five-year authorization, also included an increase in the annual limitation on premium increases from 5 percent to 8 percent. This has raised concerns about low-income homeowners and whether they will simply drop policies in the event of such an increase, destabilizing the risk pool. It also adds a new state affordability surcharge on non-residential policies, potentially subjecting publicly-owned properties in flood zones to policy surcharges.
“These bills put the National Flood Insurance Program on a path toward actuarial soundness where all will be protected, no one will be denied a policy, all will benefit from competition, the NFIP will be sustainable and the national debt clock will spin a little less rapidly,” said U.S. Rep. Jeb Hensarling, chairman of the Financial Services Committee.
In the Senate, there are several competing proposals for NFIP reauthorization. S. 1368, the Sustainable, Affordable, Fair, and Efficient National Flood Insurance Program, or SAFE NFIP Act, was introduced by Sen. Robert Menendez. This bill reauthorizes the program for six years and would freeze interest payments on the program’s debt while providing low-interest loans for homeowner mitigation projects. Unlike the other proposed plans, this legislation does not include steps to encourage private flood coverage.
A competing proposal, the Flood Insurance and Sustainability Act, from Sens. Kirsten Gillibrand and Bill Cassidy, contains a 10-year reauthorization and shifts existing surcharges to finance pre-disaster mitigation and flood mitigation assistance programs. No markup is scheduled for either bill yet.
“This bipartisan bill would help ensure that flood insurance is more affordable and not riddled with the loopholes that left homeowners on their own fighting with insurance companies while trying to recover from the devastation. It would also provide more money to help communities protect against flood risk, like those currently experiencing record flooding along Lake Ontario and the Saint Lawrence River,” said Gillibrand.
Ultimately, a long-term reform of the program is at the mercy of the Congressional calendar already choc-a-bloc with must-pass legislation. To that end, Sens. Mike Crapo and Sherrod Brown have introduced a straight reauthorization of the program. This bill includes none of the reforms offered by their colleagues.