The National Flood Insurance Program (NFIP), with millions of policies in force and trillions of dollars in possible exposure, is critical to many communities around the country. This program for decades was virtually the only way for property owners to secure flood insurance (For some background on the NFIP, see brief article here).
The NFIP expires on September 30, 2017 unless Congress reauthorizes it. Many agree the NFIP should be reauthorized, and many want to see it reauthorized for a longer period and ahead of the deadline to promote stability in the mortgage and real estate industries.
After fifteen years of lower-than-expected claims, in 2005 hurricanes Katrina, Rita, and Wilma resulted in the need for the NFIP to borrow $17.5 billion from the U.S. Treasury to cover claims. In 2012, Hurricane Sandy resulted in $8.4 billion in payouts and another $6.25 billion borrowed from the Treasury. In 2016, while no one single “catastrophic” event occurred, it was still the third highest payout year ever due to numerous flood in LA, TX, and Matthew’s flooding in many states along the east coast. Payouts of at least $4 billion are projected from these events, leading the NFIP to borrow yet another $1.6 billion in January of 2017. The NFIP’s current debt is $24.6 billion, resulting in almost $400 million of annual interest payments.
Almost no one argues against reauthorizing the NFIP. In fact, many agree that getting this done well before the September 30 deadline and authorizing the NFIP for more than the usual 5 years are good ideas. But from there things get complicated as there are many different views about how to tweak the NFIP, whether it be to make premiums more affordable, protect specific interests, reduce NFIP expenditures, or increase NFIP participation and revenue.
Some of the biggest policy debates include rising premiums and what to do about properties that have repeatedly flooded, are rebuilt/repaired with NFIP funds, and then continue to flood. Bills before Congress take widely divergent views on increasing premiums. Some parties advocate limiting yearly increases to as little as 3-7% whereas bills in Congress usually range from 10-18% annual increases for primary residences.
Repetitive loss properties pose another challenge. Some characterize large premium increases for properties built before the beginning of the NFIP as the government backing out on a “promise” to provide flood insurance to older properties. However, during development of the NFIP, it was assumed that over time, properties that did not meet NFIP minimum standards would be replaced by structures that complied with current NFIP standards. This has not happened at nearly the pace or scale over the past four decades as expected, meaning that many homes are still “pre-FIRM,” or built before the NFIP had “FIRMs” (flood insurance rate maps) for their community. The National Association of Counties “is concerned with making sure that all properties that were built prior to the release of Flood Insurance Rate Maps for their area continue to be eligible to receive rate-subsidies under each of the NFIP’s property categories.”
However, “[p]re-FIRM policies have experienced 5 times more flood damage than new properties built in compliance with NFIP flood maps and non-discounted rates.” Ironshore, http://www.ironshore.com/blog/2017-reauthorization-and-future-viability-of-the-national-flood-insurance-program “2017 Reauthorization and Future Viability of the National Flood Insurance Program.” This same source states that, “[t]he rollback of the Biggert-Waters rate increases shows the political difficulties around achieving sound rates for NFIP. There is a large group of constituents who are impacted by the rate increases, and policymakers will continue to feel intense pressures from them. There is no defined group that benefits from the rate increases, other than the general taxpayers, and this would come from a relatively small reduction in federal budget expenditures. However, if rates are not brought into line to match risk, NFIP will be unable to serve its intended purpose without continued taxpayer funded bailouts.”
An opinion piece in The Hill by Alice Hill and Craig Fugate titled “The same houses flood every year and we keep paying for them,” available at http://thehill.com/blogs/pundits-blog/energy-environment/344607-the-same-houses-flood-every-year-and-we-keep-paying-for (last visited Aug. 4, 2017), provides some stark numbers. A $56,000 house outside of Baton Rouge, Louisiana has flooded about 40 times and made $430,000 in flood claims. A house assessed at $72,400 in Houston, Texas has received over $1 million in flood insurance payouts. Just 1% of all NFIP policies accounted for 30% of all the claims ever filed under the NFIP. This leads authors Hill and Fugate to suggest that any reauthorization of the NFIP ensures that each property pays for its own risk rather than subsidizing that of other properties and that the NFIP should ensure that we stop the cycle of flood damage, flood claim, repair, and flood damage again that consumes a disproportionate amount of the NFIP’s resources.
For a summary of some of the bills before Congress in 2017 related to the NFIP, click HERE.