Filed Under:Markets, Personal Lines

FEMA Head Says Study on NFIP Affordability Could Take 2 Years

The administrator for the Federal Emergency Management Agency said it will take up to two years for a study on affordability issues related to the National Flood Insurance Program to be completed.

FEMA head W. Craig Fugate today responded to requests from critics of flood insurance rate increases set to take hold Oct. 1 under the Biggert-Waters Act of 2012. Some groups have pushed to delay the increases until a study is complete.

"It will likely take at least two years to complete the study due to the need to obtain data on policyholders and their incomes,” he said at a tense hearing convened by the Economic Policy Subcommittee of the Senate Banking Committee.

State insurance regulators, members of Congress and citizens in states from communities along the Gulf Coast, joined by officials and NFIP customers from Florida to Vermont, are voicing deep concern about the affordability issue. They fear rate increases of up to 3,000 percent as mandated by the law will force people to give up their homes.

However, Alicia Puente Cackley, director of Financial Markets and Community Investment Team for the Government Accountability Office, added GAO’s study of the issue found limited problems.

Cackley testified that, in a study of remaining subsidies, GAO estimated that with the changes in the rates mandated by B-W, approximately 438,000 policies no longer are eligible for subsidies, including about 345,000 policies for second homes, about 87,000 business policies, and about 9,000 policies for single-family properties that had severe-repetitive losses.

Coakley said that subsidies on most of the approximately 715,000 remaining subsidized policies are expected to be eliminated over time as properties are sold or coverage lapses, as are previous exemptions from rate increases after flood zone map revisions.

Fugate’s testimony was consistent with that of Coakley. He said about 20 percent of policyholders, representing approximately 1.1 million of the 5.6 million NFIP policies, now pay subsidized rates.

He added that as FEMA implements the changes stipulated in the new law, these policyholders will eventually pay rates that reflect actual risk to their properties.

“The remaining 80 percent of policyholders will not see increases as a result of this change, although it is possible that their rates will increase if, in the future, new maps reveal higher risk under the phase-out of grandfathered rates required by the legislation,” Fugate testified.

As mandated by B-W, FEMA is charged with completing a study with the National Academy of Sciences to explore ways to encourage/maintain participation in the NFIP, methods to educate consumers about the NFIP and flood risk, and methods for establishing an affordability framework for the NFIP, including implications of affordability programs for the NFIP and the Federal budget.

The hearing was demanded by Louisiana’s two senators, Mary Landrieu and David Vitter. They say the rate hikes will have a severe impact on those who live in coastal areas of their state, and ask that the rate increases be delayed until affordability studies are completed, and the accuracy of maps being used to set new rates are ascertained.

But supporters of the law asked the senators attending the meeting to hang tight. In a statement submitted at the hearing, Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies said that in those cases where assistance is truly needed, NAMIC supports providing assistance - on a means-tested basis - for those property owners who truly cannot afford the new rates.

“It is important, however, that any assistance to low-income homeowners should be fully transparent and not hidden as suppressed premiums that leave the homeowner blind to the actual risk they face from flood and the NFIP underfunded,” he said.

Steve Ellis, vice president of Taxpayers for Common Sense, added, "It is important to recognize that policyholders are not being denied the ability to purchase flood insurance.”

He said B-W “simply eliminates the subsidized rates.” Furthermore, Ellis said, while it may sound like a lot of affected properties, because pre‐Flood Insurance Rate Map (FIRM) primary residences that maintain coverage are not included, 62 percent of policyholders (715,259 policies) with subsidized premiums would be unaffected by these changes.

“In reality, the biggest shift will be that second homes and businesses that used to claim 38 percent of the subsidized policies will now represent only 1.5 percent of the total,” Ellis said. In addition, when flood maps are updated with any changes that increase rates, all properties will be subject to the new rates that will be phased in at 20 percent a year for five years, he said. “This effectively ends the previous grandfathering process where some properties retained the highly subsidized premiums for decades.”

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