Republicans Tackle Flood Insurance Reform

A Republican draft of legislation to reform the federal flood insurance program would renew the program for five years, phase out most rate subsidies, tie coverage limits to the rate of inflation, vary the deductible by how subsidized the premium is, and allow the program to sell optional additional living expense and business interruption coverages.

Insurance agents and a coalition of taxpayer and conservation groups praised the draft as a good starting point for final reform.

The proposal does not address the current $18.3 billion debt facing the National Flood Insurance Program (NFIP) largely as a result of the 2004 and 2005 hurricane seasons. But the proposal does attempt to put the program on sounder financial footing by insisting that current subsidized prices to most policyholders be raised so they eventually cover the actual cost of risk as determined by actuaries.

The draft bill was released by Rep. Judy Biggert, R-Ill., chair of the Insurance, Housing and Community Opportunity Subcommittee of the House Financial Services Committee. Her subcommittee is to begin hearings last Friday.

The NFIP is currently scheduled to expire Sept. 30. This bill would extend the program for five years until Sept. 30, 2016.

The plan pushes the program to reduce subsidies in flood insurance rates in several ways. It requires that rates for most properties be raised by 20 percent a year until they reach actuarially sound levels. These include commercial properties, vacation homes, repetitive loss properties, homes that have had damage exceeding 50 percent of their value, homes that have had improvements exceeding 30 percent of their value, and homes sold to new owners.

Also, rates for property owners in communities newly designated as in flood hazard zones would be set at 50 percent of the actuarial indications the first year, then followed by 20 percent hikes each year thereafter until they are brought in line with what actuaries say they should be.

The bill would not mandate that rates for all other existing policyholders reach actuarial rates. But it allows NFIP to raise their rates within a flex-band of between 10 percent and 20 percent a year. Current law does not allow increases above 10 percent a year.

The bill does not add wind coverage to the NFIP offerings as some lawmakers from coastal states have urged in the past, but it does add two new coverage options: additional living expenses (ALE) up to $5,000 aggregate and business interruption (BI) coverage up to $20,000 per property.

Independent insurance agents have sought many of the reforms in the Republican draft, including the optional coverages, for years.

“We’re very encouraged,” said Charles Symington, senior vice president of government affairs for the Independent Insurance Agents and Brokers of America (the Big “I”), whose group will have Connecticut agent Spencer Houldin testify at Friday’s hearing. “It’s an excellent draft. It tackles many of the issues.”

Symington said he thinks the draft will attract support from some Democrats as well as Republicans.

He said the five-year extension of NFIP after several years of short-term lapses and last-minute renewals is critical because it “gives the marketplace certainty.”

Symington said agents appreciate that the bill attempts to “modernize” the program and move it closer to “real world insurance” by phasing out subsidies, indexing coverage limits to inflation, and adding optional additional living expense and business interruption coverages— which he says makes the program more attractive to consumers.

The Big “I” lobbyist said he does not think adding coverages to a program in so much debt should be a problem because of the way the bill restricts the offering. NFIP would be able to sell ALE and BI only if no private market for them exists and only if NFIP doesn’t have to borrow money from the Treasury to do so.

The Big “I” was not alone in its praise of the Republican measure.

The bill was called a “very good start” by Eli Lehrer, the Heartland Institute, a free market think tank. Lehrer said the bill is “not perfect,” but it “has a lot of good aspects.” Lehrer said that while the bill does not directly address or forgive the massive NFIP debt, it does promise to put the program on sounder financial footing so that it may be able to pay off the debt eventually.

Lehrer criticized the bill’s inclusion of the additional living expenses and business interruption coverages as “problematic” given the flood program is already deeply in debt.

Lehrer’s group is a member of SmarterSafer.org, an unusual coalition of taxpayer, conservation, business and free market economics groups that want to see changes in the flood insurance program.

Adam Kolton, National Wildlife Federation, and Steve Ellis, Taxpayers for Common Sense, both of the SmarterSafer.org coalition, joined Lehrer in a press briefing and agreed that the bill represents a good starting point for reform.

The Wildlife Federation is critical of the NFIP because its taxpayer-subsidized insurance helps promote development in wetlands and other environmentally-sensitive areas that destroys wildlife.

Ellis, of the taxpayers watchdog organization, said the timing is good because Congress appears willing to “take up problematic programs.” The NFIP has been cited by Congressional auditors as a high risk government program for a number of years.

In other provisions, the Republican flood program draft bill would:

• Set a minimum deductible of $1,000 for policyholders whose premiums are at the cost of risk, while making $2,000 the minimum deductible available to those whose premiums are still below costs.
• Require that any property owners who let their policies lapse for lack of payment pay actuarially sound rates to restart coverage.
• Require more accurate flood maps and allow local residents and officials more input into mapping and eligibility decisions.
• Mandate two studies into privatizing the federal program. The Federal Emergency Management Agency and the Comptroller General would each be required to conduct a privatization study and report to Congress within 18 months.