As NFIP Faces Deepening Debt, Some Call for More Subsidies and Lower Rates

Updated with comments from I.I.I.'s Steve Weisbart

Congress is coming under renewed pressure from both state and federal legislators to reduce the cost of flood insurance and provide greater subsidies for the National Flood Insurance Program.

Specifically, Mississippi Rep. Steven Palazzo, R, last week introduced a bill that would slow planned flood insurance rate increases over the next 10 years by phasing out insurance subsidies over a longer period of time.

Another bill the congressman is sponsoring would offer flood-mitigation tax credits of up to $5,000 for homeowners and small businesses, as well as grant tax credits to NFIP policyholders who take steps to mitigate future flood risks.

Ironically, the bills, sponsored by Rep. Steven Palazzo, R-Miss., were introduced the day he voted for the budget proposal, sponsored by Rep. Paul Ryan, R-Wis., that calls for program cuts that would eliminate the federal government deficit over 10 years.

Additionally, the New Jersey State Senate passed a resolution last week, S.R. 102, declaring the legislature’s sense that Congress and the White House ought to “take all appropriate legislative and regulatory action necessary to increase subsidies for premiums paid for flood insurance through the NFIP, especially for property owners who have suffered frequent losses.” The resolution passed unanimously.

The pressure is coming despite the fact that a state regulator said last week that the NFIP is just “one large event” away from needing to ask Congress for permission to borrow even more money, even though its debt limit was raised 50 percent in January.

Moreover, legislation was passed last July—after years of effort—to reauthorize the program for five years. That legislation was promoted as “requiring the NFIP to adopt more actuarially sound rates for its insurance and plan for repaying funds previously borrowed from taxpayers” during floor debate and in comments by its principal supporters.

 And a key member of the House is advocating that the NFIP be privatized. Rep. Jeb Hensarling, R-Texas, said he hopes to propose such legislation later this year. He made his comments during floor debate in January on legislation that increased the NFIP’s borrowing authority by $9.7 billion, from $20.775 billion to $30.4 billion.

Last week, Mike Chaney, Mississippi insurance commissioner and head of the NAIC Property Casualty Insurance Task Force, estimated that once Sandy settlements of approximately $7 billion are paid--approximately 3 months from now—the NFIP will have a $28 billion deficit.

Palazzo justified his legislation by saying that some homeowners and small businesses in the Gulf Coast areas he represents “are facing a lot of uncertainty right now as a result of new increases scheduled to take effect over the next two years.”

He said, “I absolutely believe we must make changes to keep NFIP solvent -- people need access to affordable insurance. What I disagree with is the severe and unfair way these rates are increased over the next few years under current law.

“The financial strain on families, small businesses, and new homebuyers could ultimately affect South Mississippi’s economy.”

He wants changes made in the Biggert-Waters Flood Insurance Reform Act of 2012, passed last July.

Under the bill, which reauthorizes the NFIP until 2017, the maximum rate increase the NFIP could impose in a given year was raised from 10 percent to 20 percent, and, in some cases up to 25 percent.

Palazzo said that for those selling their home, rates would be significantly and immediately increased to get homes to the actuarially sound rate. Palazzo’s bill would reinstate the moderate growth rate after a home sale.

In commenting on the New Jersey Senate resolution, R.J. Lehmann, a senior fellow at the R Street Institute, calls the resolution a “self parody.”

“The NFIP has been offering overly generous subsidies to residents of flood-prone regions for more than 45 years, and the roughly 1 percent of policyholders who suffer ‘repetitive losses,’ (90 percent of whom were paying deeply discounted ‘grandfathered’ rates, have accounted for more than a third of all the program's claims,” Lehmann says.

 The result of the subsidies, Lehmann explains, “which the N.J. Senate apparently would like to see expanded, has been nothing but environmental catastrophe and financial ruin. To put it frankly, the NFIP is flat-broke, and has been ever since 2005, when Hurricanes Katrina, Rita and Wilma forced it borrow more than $19 billion from the U.S. Treasury just to pay its claims.”

Lehmann says there was little chance the program ever would be able to pay down that debt, and what little progress it did make was quickly erased by Hurricanes Ike in 2008 and Irene in 2011.

“But with claims still coming in from last year’s Superstorm Sandy, whatever hope may once have existed of the NFIP returning to fiscal sustainability has long since been swept away,” Lehmann notes. “When all is said and done, the Sandy claims are expected to put the program more than $30 billion in the hole, with no hope of ever digging itself back out.”

Steve Weisbart, chief economist for the Insurance Information Institute, says it is "very discouraging" to see decisionmakers attempt to backtrack on reforms designed to get rates to an actuarially sound level. "People need to be honest about what the risk really is," he says.

He proposed addressing the financial issues for homeowners through a loan program that would provide support, but not distort the true insurance exposures.

He adds that pricing risk accurately is the "right thing to do" so that people get a fair look at the risks they are facing.

Additional reporting by Phil Gusman 

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