The National Flood Insurance Program will be extended an additional 60 days beyond its scheduled May 31 expiration, after the U.S. House late May 30 approved by voice vote  an extension bill previously approved by the U.S. Senate.

The vote, which came the day House members returned from a one-week Memorial Day recess, grants a bit of additional time for both chambers to debate more substantial changes to the 44-year-old NFIP, which remains about $17.8 billion in debt to the U.S. Treasury.  Senate Majority Leader Harry Reid, D-Nev., has pledged that the Senate will take up a five-year reauthorization bill, which includes a number of key reforms, sometime in June. That bill was cleared in September 2011 by the Senate Banking Committee, while substantially similar legislation passed the full House in June 2011.

Both bills look to address the problem of the NFIP’s “premium subsidies,” which are extended to properties built before the introduction of flood insurance rate maps in the mid-1970s. These subsidized policies, estimated to be roughly 20% of all NFIP policyholders, pay only about 35% to 45% of the full-risk cost of flood insurance. The reform bills look to phase out the subsidies for second homes, commercial properties, properties that have suffered severe repetitive losses (which account for just 1% of NFIP policies, but more than 30% of total claims costs) and those that have suffered losses greater than half the value of the property.

The 60-day extension bill that now is headed to President Barack Obama’s desk actually speeds up that process somewhat. Under an amendment to the bill proposed by (insisted upon, quite frankly) Sen. Tom Coburn, R-Okla., for second homes and vacation homes receiving subsidized premiums, the first set of 25% rate increases would take effect July 1. Presuming the full five-year extension is later approved, these increases would then be scheduled annually until the property’s premiums reach actuarially indicated rates.

The House bill calls for somewhat more modest 20% increases to phase out the premium subsidies. Given that second homes constitute about 30% of all subsidized properties, and subsidized properties make up about 20% of the NFIP’s 5.6 million policies, it’s a reasonable guess that about 335,000 properties will be affected by the change.

Phasing out premium subsidies is just one of a number of changes in the reform bills that should improve the long-troubled federal flood program. The measures also allocate money to upgrade and improve federal flood maps, and bring those properties that are newly shown to lie in 100-year floodplains into the NFIP’s mandatory purchase requirements. It also steps up enforcement of the purchase requirements, increases mitigation resources, requires the NFIP to begin setting aside funds for a catastrophe reserve, and calls on the Federal Emergency Management Agency to explore using private reinsurance or catastrophe bonds to shore up the program’s claims-paying resources.

Ideally, all flood insurance would be private, and the federal government’s involvement in that market would be no more or less than its involvement in home and auto insurance. But transitioning to that state of affairs will take time, and there’s no guarantee that the private market will eagerly step up to take on the challenge. In the meantime, common sense reforms like those proposed in both the House and Senate bills go a long way toward curbing the NFIP’s most egregious problems, offering greater protections for both taxpayers and the natural environment in the process.

Featured Publications