April 25, 2023

The Honorable Warren Davidson
Subcommittee on Housing and Insurance
Committee on Financial Services
U.S. House of Representatives
Washington, D.C. 20515

The Honorable Emanuel Cleaver
Ranking Member
Subcommittee on Housing and Insurance
Committee on Financial Services
U.S. House of Representatives
Washington, D.C. 20515

Dear Chairman Davidson, Ranking Member Cleaver and members of the subcommittee:

Thank you for your decision to hold a hearing on April 28, 2023, titled “The Reauthorization of the National Flood Insurance Program: FEMA’s Perspective.” My name is Jerry Theodorou. I am the director of the R Street Institute’s (R Street) Finance, Insurance and Trade Program. R Street is a nonprofit, nonpartisan, public policy research organization based in Washington, D.C. Our mission is to engage in policy research and outreach to promote free markets and limited, effective government in many areas, including insurance. My expertise and background is in property and casualty insurance, with over 30 years employment as an insurance analyst and manager in the insurance industry. Flood insurance is an issue I follow closely. I have testified to U.S. Senate committees three times on insurance issues, including to the Banking, Housing and Urban Affairs committee hearing focused on reauthorization of the National Flood Insurance Program (NFIP), Part II, on June 16, 2022.[1]

Flooding is the most common natural disaster in the United States, and is responsible for more economic loss than any other catastrophe, according to the National Oceanic and Atmospheric Administration (NOAA).[2] The NOAA estimates that 44 percent of the country is at risk of flooding this spring.[3] The NFIP is the primary source of flood insurance, responsible for over 90 percent of the flood insurance market.[4] It is therefore important for the health of the economy and the wellbeing of Americans that the NFIP be structured and managed prudently. We support long-term reauthorization of the NFIP. We also strongly support the six reforms and action items described below for the program to perform its role more effectively to develop a flood insurance market that provides protection from flood losses for more Americans.

Risk-Based Rating. The introduction and implementation of Risk Rating 2.0 in 2022/23 was a step in the right direction to bring fairness to the flood insurance marketplace. The rating methodology prior to Risk Rating 2.0 was binary—if a home was in a floodplain the premium would be much higher than if the home was not in a floodplain.[5] This approach did not recognize the reality of the degree of flood exposure ranging widely along a scale. Risk Rating 2.0 takes into account numerous factors contributing to a home’s exposure to flood.

Private Market for Flood Insurance. The private market for flood insurance is small, estimated at approximately $300 million in premium/year, compared to the NFIP’s $3.5 billion.[6] This is largely because the NFIP has been underpricing or providing premium subsidies to many homes, a practice which has led to the NFIP being $20.5 billion in debt, not counting the $16 billion of debt forgiveness in 2017.[7] As risk-adjusted rates earn into the portfolio, private insurers will be more willing to allocate capital to flood insurance.

Public/Private Partnerships and Risk Sharing. The NFIP already avails itself of private market reinsurance. An example of how private market reinsurance has helped to reduce the burden on the NFIP’s balance sheet was the $1 billion reinsurance recovery following Hurricane Harvey in 2017.[8] The cost of the reinsurance was $150 million. We believe the NFIP should continue to structure its reinsurance tower with private market reinsurance, as well as insurance-linked securities (catastrophe bonds).

Promote Mitigation Measures. Mitigation is significantly preferable to ad hoc post-disaster government aid. What is more, mitigation sends appropriate price signals. Loss mitigation measures contribute to lower repair costs, which lead to lower insurance premiums. Many insurers give premium credits to homeowners who take measures to mitigate loss potential from flooding.

Repeatedly Flooded Properties. A disproportionately large percentage of flood losses are to homes that have been repeatedly flooded.[9] We support measures to limit loss payouts to homeowners whose properties have been repeatedly flooded and rebuilt without adopting protective measures to reduce loss potential from future flooding events. We support sanctions on homeowners and communities that fail to comply with recommended flood-mitigation measures.

Expand the Risk Pool. There are only approximately 5 million homes with flood insurance coverage out of the nation’s 70 million homes.[10]Ownership/buyership of flood insurance needs to be increased to help create a healthy risk pool that does not suffer from adverse selection. Adverse selection occurs when only those who pose more risk buy insurance.

Thank you again for holding this important hearing and for your consideration of my views. Should you have any questions or wish to have further discussion, please do not hesitate to contact me.


             Jerry Theodorou
             Director, Finance, Insurance & Trade Program
             R Street Institute
             [email protected]

[1] “Reauthorization of the National Flood Insurance Program: Protecting Communities from Flood Risk,” U.S. Senate Committee on Banking, Housing, and Urban Affairs, June 16, 2022. https://www.banking.senate.gov/hearings/reauthorization-of-the-national-flood-insurance-program-protectingcommunities-from-flood-risk.

[2] Brittney Meredith-Miller, “The 10 most costly U.S. floods,” ALM Property Casualty 360, May 18, 2022. https://www.propertycasualty360.com/2022/05/18/the-10-most-costly-u-s-floods.

[3] Elana Ashanti Jefferson, “NOAA: Nearly half of U.S. at risk of spring flooding,” ALM Property Casualty 360, March 17, 2023. https://www.propertycasualty360.com/2023/03/17/noaa-nearly-half-of-u-s-at-risk-of-spring-flooding.

[4] “Spotlight on: Flood Insurance,” Insurance Information Institute, Dec. 6, 2022. https://www.iii.org/article/spotlighton-flood-insurance#:~:text=Private%20Flood%20Insurance,-According%20to%20NAIC&text=Restated%20net%20premiums%20written%20for%202020%20are%20%24302.4
; Federal Insurance and Mitigation Administration, The Watermark 16, Federal Emergency Management Agency, 2021. https://www.fema.gov/sites/default/files/documents/fema_fy-2021-q4-watermark.pdf.

[5] Federal Emergency Management Agency, “Risk Rating 2.0: Equity in Action,” U.S. Department of Homeland Security, April 19, 2023. https://www.fema.gov/flood-insurance/risk-rating.

[6] Insurance Information Institute. https://www.iii.org/article/spotlight-on-floodinsurance#:~:text=Private%20Flood%20Insurance,-
; Federal Insurance and Mitigation
Administration. https://www.fema.gov/sites/default/files/documents/fema_fy-2021-q4-watermark.pdf.

[7] Diane P. Horn et al., “Introduction to the National Flood Insurance Program (NFIP),” Congressional Research Service, Jan. 6, 2023. https://sgp.fas.org/crs/homesec/R44593.pdf.

[8] “U.S. Flood Program to Collect $1 Billion in Reinsurance for Hurricane Harvey Claims,” Insurance Journal, Dec. 6, 2017. https://www.insurancejournal.com/news/national/2017/12/06/473261.htm.

[9] Laura Lightbody and Brian Watts, “Repeatedly Flooded Properties Will Continue to Cost Taxpayers Billions of Dollars,” The Pew Charitable Trusts, Oct. 1, 2020. https://www.pewtrusts.org/en/research-andanalysis/articles/2020/10/01/repeatedly-flooded-properties-will-continue-to-cost-taxpayers-billions-of-dollars.

[10] Diane P. Horn, “National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0,” Congressional Research Service, April 4, 2022. https://sgp.fas.org/crs/homesec/R45999.pdf.