House Financial Services NFIP Reform and Reauthorization Overview
The House Financial Services Subcommittee on Housing, Community Development and Insurance recently held a hearing on the Reauthorization and Reform of the National Flood Insurance Program (NFIP).
The NFIP is managed by the Federal Emergency Management Agency (FEMA) and allows a public option for individuals and businesses to purchase flood insurance on their properties, often when no private option is available. This is typically due to outsized risk of flooding on the property, or being priced out of the market by FEMA’s artificial rate caps and controls. Flooding is the most prevalent and most expensive form of natural disaster in the United States, and its negative effects are compounding due to climate change and the growing level of wealth in coastal, flood-prone communities.
Though the hearing was focused on shared goals of reauthorizing the program, tension remains between Rep. Maxine Waters (D-Calif.) and Committee Chairman Emanuel Cleaver (D-Mo.) and the minority, led by Ranking Member French Hill (R-Ark.). Reps. Cleaver and Waters remain focused on affordability of the program via rate caps and subsidies and forgiveness of the NFIP debt. Rep. Hill is focused on the program’s economic viability and strengthening its financial framework, leaving the two sides at odds.
The major topics of discussion during the hearing include the necessity for long-term reauthorization of the NFIP, the modernization of rate setting, mitigation of flood risk, the prevalence of repetitive loss properties, risk transfer, the program’s indebtedness and the necessity of transparency.
Necessity of Long-Term Reauthorization
The NFIP’s most recent reauthorization expired in 2017, and in the past five years has undergone about 20 short-term extensions. These extensions periodically lapsed coverage and failed to include any necessary reforms. This leaves insurance consumers in limbo and complicates home sale transactions, with the National Association of Realtors (NAR) estimating an impact to the tune of 40,000 transactions a month nationwide.
In addition to the disruptions on consumers and the real estate market, lapses in reauthorization place an unnecessary cost on the federal government, both by continuously stopping and restarting the program, and by allowing the program to reauthorize periodically over a five-year period without the inclusion of any cost-saving reforms.
The program is currently set to expire on Sept. 30, 2022 and must be reauthorized by this date.
Modernization of Rate Setting
FEMA recently rolled out a new pricing model for NFIP policies called Risk Rating 2.0, which modernized the antiquated methodology for pricing NFIP premiums. The goals of the new pricing model are “to deliver rates that are actuarialy sound, equitable, easier to understand and better reflect a property’s flood risk” using industry best practices, catastrophe models and new technology.
According to data from FEMA, 89 percent of policyholders saw minimal change or a decrease in premiums after Risk Rating 2.0, leading to the obvious conclusion that a small number of properties are causing the majority of the financial burden to the program. Rate increases remain capped at 18 percent per year by law.
Mitigation of Flood Risk
One of the primary goals of the NFIP is to mitigate the risk of flooding before it has the opportunity to destroy property. This can be accomplished in a variety of ways, including natural resource barriers (such as mangroves and wetlands), physical raising and relocation of properties, and waterproofing requirements placed on new construction. This was a major focal point of expert witness Carolyn Kousky’s testimony who serves as executive director of the Wharton Risk Center.
Due to the nature of the NFIP, properties most at risk of flooding often receive the highest level of subsidies, as the ability to afford the premiums would otherwise be impossible. This is counterintuitive and encourages people to live in—and build in—highly flood-prone areas, incentivizing people to risk both life and property.
A greater focus is being placed on mitigating flood risk before it occurs, to save money as well as lives. This appears to be a bipartisan goal of NFIP reform.
Repetitive Loss Properties
Many properties in the NFIP suffer repetitive losses, placing an outsized burden on the program to pay out for rebuilds continually in areas that are unsuitable for habitation. As opposed to repeatedly repairing and rebuilding only to experience flood damage during the next weather event, reform is being encouraged to lessen regulatory burdens on buyouts. Roy Wright, President and CEO of Insurance Institute for Business & Home Safety, stressed the necessity for easing these regulatory burdens during the hearing.
FEMA already participates in buyouts after flood events, which appear to be the end solution to many repetitive loss properties. Reforms were discussed to evaluate and identify likely—or existing—repetitive loss properties and lessen the bureaucratic thresholds to buyout solutions. This will save both the program and the homeowner time and money.
Risk Transfer
Risk transfer remains a primary concern of NFIP reform. One reform that has been put into motion is H.R. 3417, the Taxpayer Exposure Mitigation Act, which would require FEMA to purchase reinsurance to protect the program and taxpayers from catastrophic losses, a strengthening and codifying of the current reinsurance program.
Expert witness Franklin Nutter, President of the Reinsurance Association of America, stressed the necessity to allow more private, free market options for flood insurance. The flood insurance market is currently dominated by the NFIP program, as it artificially lowers premiums through subsidies and non-actuarially sound rates. Risk Rating 2.0 is one method to allow private insurers to compete in the flood insurance space, by letting rates more accurately reflect risk. Increased private market participation allows consumers a broader range of choices and lessens the financial burden on the taxpayer.
Program Indebtedness
The NFIP currently sits with about $20 billion in debt. Premium revenue primarily goes toward servicing the debt, leaving the program fiscally unsound. Rep. Waters has a bill to cancel the indebtedness of the program, and treat it “as a public debt of the United States.”
Necessity of Transparency
Individual states are required to opt-in to the NFIP if they so choose, and each state carries its own rules and regulations around flood disclosures. Issues were raised, such as homebuyers being unaware that their new home sits in a floodplain or experienced losses from flooding. The necessity of transparency around such information, as well as education on the availability of floodplain data, was encouraged by multiple witnesses including Karen McHugh, Missouri State NFIP Director.
R Street Institute Position
The R Street Institute supports the long-term reauthorization of the National Flood Insurance Program and Risk Rating 2.0, which is a necessary step forward in matching insurance rates to their actual risk. We support efforts to increase consumer participation in the NFIP, which currently holds about 5 million policies. Increased participation will give the program a better risk profile. We continue to support growing private sector options for flood insurance to give consumers a broader range of options and lessen the burden on the taxpayer.
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