Five Solutions to Help Fix the National Flood Insurance Program from R Street Testimony to the U.S. Senate Banking, Housing and Urban Affairs Committee
The National Flood Insurance Program (NFIP) was originally established in 1968 to provide flood insurance coverage that private insurers would not. The intended goal was to encourage state and local governments to guide property development away from land exposed to flood hazards and to provide flood insurance through an established cost-sharing relationship between the public and private sectors.
However, over the years, the NFIP’s objectives have not been met. Development in flood-prone areas is expanding; nearly 30 percent of the total U.S. population—almost 95 million people—live in coastline counties. Additionally, the private sector bears only a small amount of this flood risk despite the fact that flood-related economic losses in the United States have increased. In the past decade alone, losses caused by flooding totaled $943 billion. Today, the program has accumulated close to $37 billion in debt as the flood insurance it offers has been historically underpriced.
The R Street Institute has worked on the issue of flood insurance reform since opening its doors 10 years ago. It is a core policy area for our organization. So we are proud that today, R Street Institute Director of Finance, Insurance and Trade Jerry Theodorou testified before the U.S. Senate Banking, Housing and Urban Affairs Committee about overhauling the NFIP.
Theodorou’s testimony comes on the heels of recently proposed NFIP reforms that the Biden administration sent in a legislative package to congressional leaders. If enacted, this would be the most significant overhaul of the nation’s largest flood insurance provider since its creation. The program’s statutory authority expires on Sept. 30, 2022.
In his testimony, Theodorou highlighted five issues standing in the way of the NFIP achieving its mission and he proposed solutions to remedy those problem areas:
Development of a Private Market for Flood Insurance
The private market for flood insurance can be encouraged by the NFIP pricing its policies at actuarially sound rates. If NFIP rates were risk-based, private insurers could compete on the basis of service and product offerings. NFIP policies are relatively rigid. For example, the limit of insurance for homeowners is a flat $250,000 and $500,000 for commercial buildings damaged by flooding. Private insurers would offer more coverage and deductible options, affording policyholders more choice.
Reduction of Subsidies
The NFIP practice of subsidizing policies is a driver of rate inadequacy in the program. Full-risk premium rates would remove subsidies from those who do not require them. Furthermore, they would help improve solvency, and send more accurate price signals on true flood risk levels to property owners. We recommend that the Federal Emergency Management Agency (FEMA) collect data to analyze the effect of grandfathered policies on NFIP’s fiscal exposure.
FEMA subsidies should be replaced with means-tested assistance programs. Means testing would allow low-income policyholders with properties in high-risk flood areas to afford flood insurance, and would limit the provision of subsidized flood insurance to those who are least able to afford it.
Introduction of Actuarially Sound Rates for the NFIP Flood Insurance Policies
The NFIP practice of underpricing its policies dates back to the early days of the program.
Policyholders with lower-valued homes currently pay more than the actuarially determined rate, while policyholders with higher-valued homes pay less than actuarially sound risk-adjusted rates. FEMA’s Risk Rating 2.0 pricing methodology considers rebuilding costs, allowing FEMA to distribute premiums across all policyholders more equitably, on the basis of a home’s value and the property’s unique flood risk.
Although it may take some policies several years—as many as 12—with application of the highest permitted rate increase before they reach actuarially sound rates, we support the introduction of Risk Rating 2.0.
Addressing Repetitive Losses
Properties that have had numerous losses are one of the most significant contributors to the NFIP’s poor financial results. They account for a disproportionately large component of overall NFIP losses. But to date, the NFIP has not satisfactorily dealt with repetitive loss properties.
The NFIP and FEMA do take some measures to try to reduce losses from repeatedly flooded properties. These measures include elevation of homes and buyouts or relocations of homes to areas not prone to flooding. From 1989 to 2018, FEMA has assisted states and localities to mitigate over 50,000 properties. Acquisition of properties has accounted for approximately 80 percent of mitigated properties nationwide. In some states, elevation was more commonly used. The number of non-mitigated repetitive loss properties—those which experienced flooding two or more times in 10 years—has grown. The volume of mitigation efforts varies by state. In some states, such as Missouri and North Carolina, there were numerous mitigations compared to the number of their repetitive loss properties, while in others, such as Florida, New York, Louisiana and Texas, there were fewer mitigations.
Need for Reauthorization of the NFIP
The most recent reauthorization of the NFIP was in 2012. The NFIP’s five-year reauthorization ended on Sept. 30, 2017, and since then, the program has been funded by a series of short-term measures.
Congress must periodically renew the NFIP’s statutory authority to operate. On March 11, 2022, President Joe Biden signed legislation passed by Congress to extend the NFIP’s authorization to Sept. 30, 2022. Congress must now reauthorize the NFIP by September 30 to avoid a lapse in authority. We believe that a multi-year reauthorization, combined with substantive reforms, will enable the NFIP to continue its work to reduce flood risk. An extended NFIP reauthorization would create an opportunity to take bold steps to reduce weaknesses in the program.
Read more of Jerry Theodorou’s full testimony to the Senate Banking, Housing and Urban Affairs Committee here, or watch the hearing including his remarks here.
A quick note about this year: It is our 10th anniversary and since our founding in 2012, insurance has been a core area of focus in our public policy portfolio. We have for years analyzed the NFIP, including contributing to the 2012 Biggert-Waters Flood Insurance Reform Act, and consistently called for reforms to the fiscally unsustainable program. We have also released nine annual state insurance report cards seeking to provide details about consumer affordability, access and solvency around state insurance regulation. As the 2020 report noted, “The insurance market is both the largest and most significant portion of the financial services industry to be regulated almost entirely at the state level.” Learn more about our insurance work here.