The Senate is likely to overcome procedural hurdles this week and pass and send to President Obama legislation revamping the National Flood Insurance Program rate scheme.

However, any insurance-industry official who thinks this marks the end of the flood insurance rate crisis should think again.

The bill as crafted by the House removes flood insurance from the political wars for the time being. When enacted, it will shift the immediate burden to the Federal Emergency Management Agency.

In a book and movie written about the events in Remagen, Germany in 1945, the U.S. captured the only bridge over the Rhine that was not blown up. The Germans gave a colonel responsibility for defending the bridge and blowing it up without any resources to do so. Then, when he failed, they lined him up before a firing squad.

The flood bill now before the Senate essentially does the same to FEMA.

Now, when a constituent writes a letter to his or her congressman complaining about flood insurance premium-rate hikes, the congressman will merely write a letter blasting FEMA officials for their audacity in making the constituent pay a fair price for flood insurance.

It's called political cover, and it is written into the bill. And when an event occurs, that constituent will demand huge payments and fast service on a claim, and the congressman will back him or her up.

However, key provisions of the legislation include language limiting rate increases to 18% a year, and also instruct FEMA leaders, who oversee the federal-flood insurance program, to “strive to minimize the number of policies with annual premiums that exceed 1% of the total coverage provided by the policy.”

But an 18% annual increase over a period of several years will still make flood insurance unaffordable for homeowners in areas prone to flooding. And, revising the software needed to implement the changes will take months and cost the industry millions of dollars.

As one lobbyist noted, “Asking an agency to 'strive' is a new one for me. It's sort of like saying 'try really, really, really hard.' If they were anywhere close to keeping rates at 1% of coverage, they wouldn't be having a problem in the first place.”

Therefore, while this legislation kicks the issue down the road for time for “adroit” politicians, the insurance industry is going to be forced to continually invest expensive lobbying time and research resources to monitor consumer reaction and the unknown financial implications of this legislation.

Collins amendment clarity

A hearing will be held Tuesday by a Senate Banking Committee subcommittee on capital requirements for insurance companies now regulated by the Federal Reserve, including nonbank SIFIs and insurance companies with savings and loan holding companies (SLHCs).

According to analysts at Washington Analysis and FBR Capital Research, Sen. Susan Collins, R-Maine, will testify to clarify her “Collins amendment,” which requires the Federal Reserve Board to impose certain minimum leverage, liquidity and risk-based capital requirements on holding companies, including savings and loans and systemically important nonbank financial companies it oversees.

The amendment was written in 2010, when members of Congress were focused on gaining political cover from the fallout of the financial problems of American International Group. Now, Collins has since made clear to Fed officials that her intent was not to subject insurers to strict bank capital standards if the Fed was their prudential regulator.

According to Washington Analysis and FBR Capital Research analysts, she is expected to reiterate that position in testimony before the panel Tuesday. She is anticipated to testify that her amendment should not be used to apply bank-centric capital rules on insurance companies, FRB Capital analysts said.

Ryan Schoen of Washington Analysis says, “Comments from Federal Reserve officials in recent weeks—including Chair Janet Yellen—bolster our view that regulators are unlikely to develop capital rules for the largest insurers, AIG, MetLife and Prudential Financial, “that are bank-centric or ignore business model considerations, a positive development for the group.” Schoen adds, “In our opinion there is little to no support in Congress, or among regulators, for subjecting insurers to bank-like capital rules.”

The “Neil Bill,” by any and all other names

The Obama administration's budget blueprint for 2015 again calls for removing some of the tax advantages offshore insurers gain by ceding the premiums yielded by their U.S. affiliates to offshore units. Under the provision, U.S. affiliates would receive offsets against this taxable income for ceding commissions, returned premiums and recoverables. It would apply to the US subsidiaries of all non-U.S. insurers.

However, the provision is not as stringent as those proposed in legislation introduced in the House and Senate on the issue. Nor is it likely that hostile Republicans would support any of the administration's tax proposals, in other words, the budget is dead on arrival.

At the same time, the Camp comprehensive tax reform proposal, which came out last week, does include the stronger language contained in legislation introduced in the House and Senate and strongly supported by domestic insurers. Those bills are H.R. 2054 and S. 991, introduced by Reps. Richard Neal, D-Mass., and Rep. Bill Pascrell, D-N.J. and Sen. Robert Menendez, D-N.J.

These bills state that offshore insurance company would not be allowed a deduction for non-taxed reinsurance premiums paid. In addition, the insurance company's income would be determined by not taking into account (so no deduction is allowed for) any additional amount paid with respect to the reinsurance for which the non-taxed reinsurance premium is paid to the extent he additional amount is not properly allocable to the premiums.

The Camp proposal also says the only way an offshore insurer would not pay the additional tax would be if it could demonstrate that it is paying a tax rate outside the U.S. equal to or higher than the U.S. tax rate.

A similar proposal was supported last year in a tax-reform proposal written by Sen. Max Baucus, D-Mont., then chairman of the Senate Finance Committee. Baucus stepped down several weeks ago to accept a job as U.S. ambassador to China. But the proposal was approved last year by the full Senate Finance Committee.

It is unclear what the impact will be of the Camp draft. The House Republican caucus has strongly come out in opposition. Camp has also stated he would only support the offshore tax measure if it was part of comprehensive tax reform, and not as a “pay-for” for other legislation. And he is term-limited, and will likely be replaced next year as chairman of the House Ways and Means Committee by Rep. Paul Ryan, R-Wis., who has not announced whether he will support the Camp tax reform package or will come up with his own proposal.

Opponents of the tax proposal have created their own lobbying group, the Coalition for Competitive Insurance Rates (CCIR). This group includes state insurance regulators, Florida catastrophe insurance advocates and the Risk and Insurance Management Society.

Other opponents include insurance regulators from Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Pennsylvania; agriculture commissioners from Florida, Tennessee and Texas; and, Florida Governor Rick Scott and Georgia Lieutenant Governor Casey Cagle.

Special Reports /

The Washington Report: Flood Bill Puts FEMA Before the Firing Squad

Related Stories

Recommended For You