The Flood Insurance program has been extended, but no long-term solution.
By Sue Johnson, strategic alliance consultant
On July 31, Congress passed a four-month extension of the National Flood Insurance Program (NFIP) just hours before it was set to expire at midnight. The legislation was the seventh short-term extension of the NFIP since September 2017.
The NFIP program had to be extended, of course. Any lapse in NFIP coverage could have created disruptions in home sales and closings in many areas of the country. But the extension also highlighted the need for Congress to reach a long-term solution to flood insurance reform, which it has struggled with for years.
Why Flood Insurance Reform is Needed
Congress created the NFIP in 1968 to assume the growing expense of natural disasters that private companies at the time were reluctant to insure. It’s administered by the Federal Emergency Management Agency (FEMA), which falls under the Department of Homeland Security. Flood insurance is mandatory for any property located in a high-risk area with a mortgage from a federally-backed or regulated lender.
In its early years, the NFIP was able to pay for itself through annual premiums, now estimated to be $3.5 billion. But it was not designed to cover claims for truly extreme events. Instead, the law allowed the program to borrow money from the U.S. Treasury as needed.
In recent years, the NFIP fund was walloped by hurricanes and superstorms like Katrina, Sandy, and Matthew, making it necessary for the program to borrow from the U.S. Treasury to cover the huge payouts. According to a Congressional Budget Office report released at the beginning of the 2017 Atlantic hurricane season, the NFIB program had a debt of about $25 billion and an expected annual shortfall of $1.4 billion.
The 2017 hurricane season only made matters worse. Four hurricanes, three of which were classified as major, made landfall: Harvey, Irma, Maria, and Nate. Nearly two dozen massive wildfires burned more than 200,000 acres of land in northern California. According to a November 30, 2017 report from FEMA, it had spent more than $2 billion in disaster assistance and received approximately 120,000 claims resulting in payments totaling more than $6.3 billion. Congress canceled $16 billion of NFIP debt in October 2017, making it possible for the program to fund its estimated 2017 losses and anticipated programmatic activities. A July 2018 Congressional Research Service Report estimated its current debt as $20.525 billion and its existing borrowing authority as $9.9 billion.
The Politics of Flood Insurance Reform
Most Members of Congress agree that the NFIP should be overhauled to ensure it is financially sustainable, but the path towards long-term reform gets complicated by disagreements over how it should be reformed and the extent to which a private flood insurance market should be encouraged. Critics of the NFIP claim that it encourages people and businesses to build and rebuild in dangerous floodplains. They say that NFIP premiums are not priced to be actuarially sound and that FEMA should be required to set rates that reflect the actual cost of insurance. The Government Accounting Office (GAO) has reported that 85 percent of coastal NFIP properties pay less than the full risk-based rate of coverage.
Congressional representatives in coastal areas have generally opposed legislative changes that could make NFIP policy premiums less affordable. Other topics in flood insurance negotiations have included the updating of federal flood mapping procedures, whether NFIP policy coverage for new construction in high-risk areas should be restricted, funding for flood mitigation, and the scope of the NFIP’s mandatory purchase requirements.
The House of Representatives has twice passed bipartisan legislation (the Flood Insurance Market Parity and Modernization Act) that would encourage the sale of private flood insurance by removing excessive federal restrictions and giving states more flexibility to license and regulate private flood insurance carriers. But the legislation so far has made little headway in the Senate. Many Senate Democrats argue that private insurance carriers could cherry pick low-risk policies, leaving the already-indebted NFIP with the riskier policies. Some Senators also oppose taking up legislation to bolster the private insurance market separately from long-term NFIP reform.
Can Congress Reach an Agreement?
The four-month extension delayed the broader debate until after the 2018 hurricane season and midterm elections. The question now is whether Congress can reach an agreement before November 30 on a long-term solution to flood insurance reform that improves the financial solvency of the NFIP, assures adequate flood insurance coverage, and addresses affordability concerns. n
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