Senate Okays Flood Cover Extension, But GAO Says Serious Reforms Required

Washington

The U.S. Senate last week unanimously voted to extend the current National Flood Insurance Program for one year–until Sept. 30, 2011–with industry trade group officials lauding the development and urging the House to also act promptly.

However, after the vote, the Government Accountability Office cautioned members of the Senate Banking Committee that major changes in NFIP policies and administration are needed and may involve tough decisions Congress might be unwilling to make.

Chris Dodd, D-Conn., chair of the committee, said at a hearing on flood insurance after the vote that "a multiyear reform bill is preferable to an extension."

However, he added that a one-year extension "will, in my view, provide necessary program and market stability to homeowners, lenders and insurers while Congress considers the next steps for the reform of the NFIP."

Without House action to match S. 3814–the "Flood Insurance Extension Act of 2010," sponsored by Sen. David Vitter, R-La.–the program will expire at the end of the current fiscal year on Sept. 30.

"Now that the Senate has acted, it's incumbent upon the House to pass the extension before they break for the mid-term elections," said Blain Rethmeier, a representative for the American Insurance Association. "We have every expectation that will happen and look forward to the program being in place for one year."

Charles Symington Jr., senior vice president for government affairs at the Independent Insurance Agents and Brokers of America, observed that the NFIP recently endured a month-long lapse. He voiced concern that this and other recent expirations and temporary extensions "are negatively impacting the market."

Following the Senate vote, nine trade groups representing property and casualty insurance and real estate interests sent a letter to the congressional leadership urging prompt action on the extension. The letter was sent amid signs that Congress intends to leave later this week to campaign, either Sept. 29 or 30, according to AIA officials.

In their letter, the groups said they "respectfully request the House and Senate take immediate action to reauthorize and extend the program for at least one year."

The letter noted a National Association of Realtors estimate that every day the NFIP is expired could cause the delay of 1,400 real estate transactions. "Even the possibility of an upcoming expiration of the NFIP contributes to the confusion and risk for families in the real world," the letter said. "It is for this reason, to both avoid further potential expirations AND to avoid confusion that the short-term extensions cause, that we urge Congress to approve an extension of at least one year's length."

The letter was signed by the American Insurance Association, the American Land Title Association, the Council of Insurance Agents and Brokers, the Financial Services Roundtable, the Independent Insurance Agents and Brokers of America, the Mortgage Bankers Association, the National Association of Realtors, the National Association of Mutual Insurance Companies, and the Property Casualty Insurers Association of America.

Meanwhile, GAO's director of financial markets and community investment, Orice Williams Brown, cautioned at the Senate hearing that "addressing the financial challenges facing NFIP would likely require actions by both FEMA and Congress that involve trade-offs, and the challenges could be difficult to remedy."

Ms. Brown testified that the flood program is, by design, not actuarially sound. "NFIP cannot do some of the things that private insurers do to manage their risks," she said. For example, she noted, NFIP is not structured to build a capital surplus, is likely unable to be able to purchase reinsurance to cover catastrophic losses, cannot reject high-risk applicants, and is subject to statutory limits on rate increases.

In addition, she said, its premium rates do not reflect actual flood risk. "For example, nearly one-in-four property owners pay subsidized rates, 'full-risk' rates may not reflect the full risk of flooding, and NFIP allows 'grandfathered' rates that permit some property owners to continue paying rates that do not reflect reassessments of their properties' flood risk."

Further, she said, NFIP cannot deny insurance on the basis of frequent losses and thus must provide policies for repetitive loss properties, which represent only 1 percent of policies but account for 25-to-30 percent of claims.

Ms. Brown pointed out that "reducing subsidies could increase collected premiums but reduce program participation." At the same time, she said, "FEMA must address its operational and management issues."

She said NFIP is unlikely to pay off its full $18.8 billion debt, run up after Hurricane Katrina, especially if it faces catastrophic loss years.

Ms. Brown was also critical of the Write-Your-Own program, in which private insurers sell and administer NFIP policies. She said payments to WYO insurers represent one-third to two-thirds of premiums collected.

However, she noted, "FEMA does not systematically consider actual flood insurance expense information when calculating these payments and has not aligned its WYO bonus structure with NFIP goals or implemented all of its financial controls for the WYO program."

She said that GAO also found that FEMA did not consistently follow its procedures for monitoring non-WYO contractors or coordinate contract monitoring responsibilities among departments on some contracts. "Some contract monitoring records were missing, and no system was in place that would allow departments to share information on contractor deficiencies," she said.

In ongoing GAO work examining FEMA's management of NFIP, some similar issues are emerging, she said.

For example, FEMA still lacks an effective system to manage flood insurance policy and claims data, despite investing roughly seven years and $40 million on a new system whose development has been halted. "However, FEMA has begun to acknowledge its management challenges and develop a plan of action," Ms. Brown said.

Sen. Roger Wicker, R-Miss., a member of the Senate Banking Committee, added at the flood hearing that while he is "glad" the Senate passed the one-year extension of NFIP, "this is just a band-aid."

He said that in talking with Mississippians, "it is clear that the NFIP needs to be reauthorized on a long-term basis and in a way that addresses some of the unique challenges of coastal areas."

"One of the greatest examples of [Hurricane] Katrina's lingering effects–and one of the biggest impediments to our rebuilding efforts–is the lack of affordable insurance," Sen. Wicker said at the hearing.

He pointed out that the key problem when it comes to protecting property owners from hurricanes is that two kinds of insurance coverage are required–wind and flood. He reiterated his support for multiperil insurance as well as other new proposals to address some of the problems residents face on the Gulf Coast.

Sen. Wicker highlighted legislation he introduced in July known as the Coordination of Wind and Flood Perils Act, S. 3672, as a way to help property owners after a hurricane.

Sen. Wicker said that under his bill, the burden of determining flood and wind loss allocation would be removed from the policyholder and placed on the insurers.

Along with the coordination of wind and flood benefits, Sen. Wicker also urged the committee to consider comprehensive reform legislation that would improve flood maps and provide incentives for property owners to make their homes and businesses more flood and wind-proof.