NFIP: The Next Move

The proposed expansion likely caused more harm than good from a legislative perspective as well. While many members of Congress—on both sides of the aisle—supported reforming the NFIP, they were less enthused about expanding the program to include windstorm coverage and the ensuing loss of a private market. A small but vocal minority led by Taylor pressed to include the package in any NFIP bill, but the resulting reform legislation including Taylor's provision ultimately withered on the vine. This left the program to continue operating in an unsustainable fashion. "There weren't too many people who supported expanding the NFIP to absorb the windstorm market," Chamness said. "But the ones who did were loud enough to keep everyone else from talking and getting real reforms through the legislative process."

A troubled past

Prior to Election Day, much of 2010 was turbulent for all involved with the NFIP. Starting in December 2009, the program was repeatedly allowed to lapse, or as the NFIP terms it, go on "hiatus." These lapses stretched from a few days to much of the month of June last year, which also marked the beginning of the annual hurricane season. In virtually every case, this was because the extension was tied to a separate, more high-profile and hot-button issue, such as an extension for unemployment insurance.

The Federal Emergency Management Agency (FEMA), which oversees NFIP, provided guidance for companies during a lapse. In the event of a hiatus, FEMA advised insurers to process claims as though the program were still in place, with payment from the government to be received once a reauthorization had passed. This may have convinced members of Congress that a lapse was of no great concern, as homeowners and businesses were still covered; however, they seemingly failed to take into account the potential havoc a lapse could cause in the housing market. With companies unable to write new coverage, would-be homebuyers were unable to obtain mortgage loans, resulting in delays or cancellations of as many as 1,400 closings per day, according to one estimate.

"Our office received dozens of calls and e-mails from insurers, agents, developers, lenders and ordinary Americans trying to buy or sell a home in a very difficult housing market asking the same question, 'Why can't we get this done?' and we shared their frustration," said Jimi Grande, senior vice president of federal and political affairs for NAMIC in Washington, D.C. "Usually, the reason the lapse occurred had nothing to do with the NFIP itself."

In many cases in 2010, NFIP extensions were tied to more controversial provisions, such as defense spending legislation, with the program becoming collateral damage of those political dogfights. "When the one-year extension finally passed in September, it was without opposition in the House," Grande said.

These and many previous lapses took a significant toll on insurers as well. In June of last year, State Farm announced it would transition its flood insurance policies to the NFIP Direct program, allowing its agents to sell NFIP Direct flood insurance policies, but moving the policy servicing and claims adjusting to the direct authority of FEMA and government-designated adjusters. In announcing the move, the company specifically mentioned the drain in resources created by these stop/start situations.

Next steps

Weeks after the November elections, FEMA launched a multi-step, comprehensive analysis of the program, considering a variety of different directions in which to go, from maintaining the status quo to abandoning the program altogether.

For its part, NAMIC has proposed a series of reforms to optimize the program and return the NFIP to financial stability and sustainability. Those solutions include:

1. Actuarially sound rates. The separation of rates from the actual cost of living in a flood-prone area represents the biggest problem with the program today. To avoid encouraging citizens to move to risk-prone or environmentally fragile areas, the actual price charged for flood coverage must reflect the actual risk. The rates charged for flood coverage should be actuarially sound to get the program on solid footing.
2. Updated flood zone maps. Additional federal funds should be allocated to the national flood hazard mapping program. Updating and improving flood maps should be a priority of FEMA, as well as identifying communities that will benefit most from updated flood maps. Speedy adoption of updated flood maps should be encouraged so that people in flood-prone areas can get the protection they need.
3. Long-term reauthorization. Repeated short-term reauthorization creates uncertainty and can lead to lapses in the program, as we saw in 2010. During these lapses, companies were not permitted to write new policies, issue increased coverage on existing policies, or issue renewal policies. The NFIP should be reauthorized for an extended time period in order to give more stability to the program and consumers.
4. Outside subsidies. As noted above, the move to actuarially sound rates is likely to be painful due to the higher premiums that will be charged. For those citizens who require it, flood vouchers might be offered—independent of the NFIP—to help mitigate the costs. Any additional subsidies that the government determines are necessary must be independent and transparent.
5. Improve take-up rates. Currently only 20 percent to 30 percent of property owners exposed to flood hazards actually purchase insurance. The program needs to improve these numbers dramatically in order to stay on a stable fiscal footing. There are several possible ways to improve these take-up rates:

• Data monitoring—FEMA and the NFIP's policy and claims monitoring systems are deficient, as highlighted by a recent Government Accountability Office study on at-risk federal programs. New and clearer procedures for monitoring contracts will improve take-up rates and enforcement by mortgage lenders.
• Stiffer penalties—Fines should be imposed on financial institutions that fail to require flood insurance coverage for mortgages on properties in flood-prone areas or allow those policies to lapse.
• Improved education—The NFIP should be given additional resources and a renewed mandate to improve and expand its public education programs to ensure that more people are aware of the program and the benefits of having flood insurance coverage to protect their properties.
• Disaster relief waiver—Require homeowners in flood-prone areas to sign a waiver stipulating that they forfeit their right to disaster relief in the event they choose not to purchase flood insurance.

Congress this year began work on the issue with a March 11 House Financial Services subcommittee hearing. "With fewer distractions, and without a need to rush through an extension, we're looking to make significant progress on reforming the NFIP this year," said Sandra Parrillo, president and CEO of Rhode Island-based Providence Mutual and chairman of the board of directors for NAMIC. "The reforms NAMIC has proposed have strong support on both sides of the aisle and can help move the NFIP toward a more solid financial footing."

Not everyone is interested in saving the NFIP, however. At least one member of Congress, Rep. Candice Miller, R-Mich., believes it's time for the NFIP to be dissolved and has introduced legislation to terminate the program.

Calls for an end to the NFIP, however, fail to acknowledge that the problems presented by flooding haven't changed. Moreover, Miller's bill isn't likely to save the government or the taxpayers any money. Rather than providing support to a privately administered insurance program that requires policyholders to pay into the system, Miller would have the federal government returning to the reactive policies of post-event federal relief at the expense of taxpayers. Additionally, her proposal offers little guidance as to what to do about the program's debt.

"When it comes to the threat posed by flooding, nothing has changed," Parrillo said. "It's still capable of striking virtually anywhere at virtually any time with devastating results. In 2010 alone, we saw massive flooding in Tennessee and Rhode Island. A strong, financially viable National Flood Insurance Program is the only sensible answer we have for that risk."