WASHINGTON (June 29, 2012) — After nearly eight years of debate, Congress is finally set to bring a measure of fiscal sanity and sound insurance principles to the National Flood Insurance Program, with today’s 373-52 vote by the U.S. House and 74-19 vote by the U.S. Senate to adopt a five-year reauthorization of the NFIP that includes a number of important reforms.

The flood insurance reform language was attached to a surface transportation conference report that also extends federal highway funding for two years; extends 3.4% student loan interest rates for one year; creates a new tax on roll-your-own cigarettes; and adjusts the way pension liabilities are funded with $20 billion in new tax and fee revenues from companies.

“While we would have preferred to see the NFIP get a stand-alone vote, rather than be attached to a piece of legislation that includes billions in new taxes and spending, we are pleased that Congress finally saw the light that it must address the fiscally irresponsible, environmentally destructive and, frankly, unsustainable flood insurance program,” said R.J. Lehmann, public affairs director of the R Street Institute.

Among its most important provisions, the measure phases out decades-old premium subsidies for 355,000 second homes, commercial properties, severe repetitive loss properties and properties that have experienced flood damage exceeding their fair market value, in the process producing $2 billion more in revenue for the NFIP over the next decade. The bill also bars any future subsidies for new flood insurance policies or for policies that property owners have allowed to lapse.

The Federal Emergency Management Agency is also asked to more accurately calculate actuarial premiums for its 5.1 million policyholders across the board by incorporating historical flood loss obligations. The program’s cap on annual increases in premium rates is raised from 10 percent to 20 percent and FEMA is granted more flexibility to adjust rates within various risk categories.

The NFIP also will be asked to build a reserve fund equal to 1 percent of its total obligations to better prepare for future catastrophic losses. FEMA is required to produce a report explaining how the program will pay off its is existing nearly $18 billion in debt the to U.S. Treasury, most of it accrued during the record 2005 storm season, within the next decade.

The bill also opens the door, if just slightly, to greater private sector participation in flood insurance risks. FEMA is requested to examine the use of private reinsurance or catastrophe bonds to shore up its financial strength. Lenders are also required to accept flood insurance coverage from private insurers to satisfy mandatory purchase requirements, provided the coverage meets the same requirements as the NFIP.

Unfortunately, the final bill does not include language that had been in the version passed by the Senate Banking Committee that would have required communities protected by levees and other flood control structures to participate in the NFIP, with rates set in accordance with the risk that the levees or other structures might fail. R Street had urged the Senate to preserve that language, as it embodies one of the key lessons of the levee failures seen in Hurricane Katrina.

“This bill is imperfect and doesn’t go nearly far enough toward shielding taxpayers, ending environmentally destructive subsidies and transferring flood risks to the private market as we would like to see. It is, nonetheless, a step forward and Congress should be commended for taking that step,” Lehmann said.

R Street is a non-profit public policy research organization that supports free markets; limited, effective government; and responsible environmental stewardship. It has headquarters in Washington, D.C. and branch offices in Tallahassee, Fla.; Austin,Texas; and Columbus, Ohio. R Street’s co-founders previously were the staff of the Heartland Institute’s Center on Finance, Insurance and Real Estate. Its website is www.redesign.rstreet.org.

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