From the June 2011 issue of American Agent & Broker •Subscribe!

Still Afloat

Congress finally on track for NFIP reform

Once again, we face a looming expiration of the National Flood Insurance Program (NFIP), with the program’s authorization set to expire on September 30 of this year. NFIP has received temporary reauthorizations eight times since 2008 and has gone into technical lapse on several occasions.

The good news is that this time, Congress has started to address a comprehensive flood insurance reform bill well in advance of the next deadline. Already, hearings have been held before the House Subcommittee on Insurance, Housing and Community Opportunity and on April 11, 2011, the subcommittee passed the Flood Insurance Reform Act of 2011 (H.R.1309). PIA has endorsed this bill and has reaffirmed its support of the NFIP.

Importantly, the bill includes a full 5-year reauthorization of the NFIP, breaking the cycle of start-and-stop temporary reauthorizations that have plagued the program since 2002. The bill wisely excludes any addition of wind coverage, increases coverage limits relative to inflation, adds further coverage options (e.g., loss of use of personal residence and business interruption), and allows premiums to be paid in quarterly installments.

Related: Read the article "Focus on debt could imperil future of NFIP" by Arthur D. Postal.

One of the most significant reform measures in the bill relates to the actuarial soundness of the program. Under the House draft, a Technical Mapping Advisory Council will be created to develop new mapping standards to ensure that risks are better reflected, maps are more gradated, current land use and topography is reflected, the incorporation of levees and other flood protection systems (including those that are decertified) are included and that restored wetlands and natural buffers are part of the rating process.

Privatization Not a Panacea

The House bill also mandates a study of the options and strategies for privatizing the NFIP. At a recent House hearing, Federal Emergency Management Agency (FEMA) Administrator Craig Fugate testified that without involvement from the private sector, the NFIP is unlikely to retire the program’s $17.5 billion debt caused by Hurricane Katrina.

Related: Read Mark E. Ruquet's "Privatizing flood insurance".

Greater private-sector involvement is a laudable goal; however, the fact remains that for decades the private insurance industry has been almost entirely unwilling to underwrite flood insurance because of the catastrophic nature of these disasters. This situation has not changed, and hoping that it will does not address the problem.

PIA is concerned with language in the bill calling on FEMA and the Government Accountability Office (GAO) to conduct a study on privatization and requiring that recommendations be made within 18 months.

When it comes to reforming the NFIP, privatization is not a panacea. Solving the program’s problems can be accomplished by the common-sense reforms proposed in H.R. 1309. What should be avoided is a public-private hybrid approach that places good risks in the private sector and assigns bad risks to the government. Such an approach would aggravate rather than minimize the program’s problems.

800-pound Gorilla

The program’s debt is, of course, the 800-pound gorilla in the room that nobody wants to talk about, so they don’t. And there is no need to talk about it at this point. Apparently realizing that the political climate is not conducive to any discussion of debt forgiveness, H.R. 1309 does not attempt to address the debt issue.

That’s the correct approach. FEMA receives approximately $3.3 billion each year in flood insurance premiums and fees, leaving slightly more than half to keep on hand to cover any future policy claims and continue administering the program. While the NFIP remains on the GAO’s high-risk list, the Congressional Budget Office has opined that premiums should be adequate to cover claims.

Related: Read "Old issues, new congress" by Ted Besesparis.

FEMA’s Fugate told the subcommittee that the need for subsidies within the NFIP makes it unlikely that the program will ever be able to pay off its debt. He said the cost of subsidies in the current program, given mainly to ease costs for people brought into the program under recently updated flood maps, is reducing annual premium income by one-third. Fugate said while the current program collects more than $3 billion in premium revenue annually, estimates indicate an additional $1.5 billion in premium revenue is lost due to the current subsidized rate policy.

Nevertheless, the fact remains that more than anything else, what ails the NFIP is the presence of the old debt that is due to the "shock losses" incurred as a result of a series of major, unpredictable catastrophic storms in 2004 and 2005. The program was fiscally sound before this period, and will be on firmer footing again once reforms are enacted. But the Katrina debt will continue to be a drag on the program. At some point it will be necessary to stop pushing these costs forward, bite the bullet and finally forgive the Katrina debt, to enable the program to fully rebuild reserves for future flooding events.

The U.S. Senate has put together a draft companion reform bill. PIA is cautiously optimistic about the outcome. We particularly appreciate the leadership on this issue by the chairwoman of the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity, Rep. Judy Biggert, R-Ill.

The NFIP is in need of substantive reforms, and efforts to pass reform legislation are well underway on Capitol Hill. H.R. 1309 is a good bill that takes big steps in the right direction. That is good news, because one thing is certain: The need for the NFIP has not diminished.

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