Chairwoman Waters, Ranking Member McHenry and members of the

My name is R.J. Lehmann, and I am director of finance,
insurance and trade policy at the R Street Institute, of which I am also a
co-founder. R Street is a nonpartisan, nonprofit research organization and our
mission is to identify and promote pragmatic, market-oriented solutions to
public policy challenges. I appreciate the opportunity to testify and to share
our views on potential reforms to the National Flood Insurance Program (NFIP),
which has been a core research area for R Street since opening our doors seven
years ago.

The NFIP is a textbook example of unintended consequences.
It was established to correct a market dislocation, by providing coverage that
private insurers would not; to reduce the nation’s reliance on post-hoc
disaster assistance; to provide incentives for communities to invest in
mitigation; and to be self-sustaining. It has not been self-sustaining, as the
program has been forced to borrow nearly $40 billion from the U.S. Treasury
over the past decade and a half. Disaster spending continues to grow, with more than 90 percent
of all federally declared disasters involving floods. While the program has
provided incentives for mitigation, these have not gone far enough, and the
availability of cheap flood insurance has played a role encouraging people to
build in flood-prone regions. The number of Americans living
in coastal counties
grew by 45 percent from 1970 to 2010 and now comprises
more than half the U.S. population. And while the NFIP does continue to fill an
important role in insurance markets, its subsidies and mispriced risks distort
those markets and discourage the emergence of private alternatives.

R Street is ideologically situated on the political right, but
we long have prided ourselves on our willingness to form broad coalitions across
the ideological spectrum that enable work with any policymaker or organization who
shares our perspectives. In the area of flood insurance, this has been manifest
in our status as a founding and active member of the SmarterSafer Coalition,
which brings together fellow free-market groups, environmental and conservation
advocates, taxpayer advocates, insurance interests, and housing and mitigation
experts to advocate for effective and efficient disaster policy. SmarterSafer,
represented on this panel by the National Wildlife Federation, advocates reforms
to the NFIP to make it fiscally sustainable, to remove incentives to
development in flood-prone and environmentally sensitive regions, to invest in
mitigation and more accurate mapping, to facilitate consumer choice in flood
insurance products and to ensure that property owners and the general public
have clear information about flood risks.

Reviewing several of the draft bills the committee will
consider, I am heartened that they make significant progress to address several
of these priorities. I also hope to highlight a few areas where further reform
would be appropriate.


The most significant new element introduced in the
discussion draft is the proposed demonstration project for means-tested
discounted rates. I would like to commend the chairwoman, in particular, for
her commitment to this issue. Addressing affordability has been a topic toward
which members have paid quite a bit of lip service over the past 15 years, but
this is the first substantial proposal to do exactly that.

The bill’s demonstration project would extend premium
discounts to households making less than 80 percent of an area’s median
household income, with discounted rates that would be capped at 2 percent of
annual area median income. Along with other members of the Smarter Safer
Coalition, we have long advocated for affordability provisions to help those
who are low income, with means-tested assistance outside of the rate structure.
Our view is that vouchers or other forms of direct premium assistance are
preferable to discounted rates because they ensure the NFIP continues to
receive the appropriate amount of premium.

In looking at the draft bill, I have some concern that the
premium caps may not be ideally structured to assist those who truly need it.
While the 80 percent threshold may be appropriate in some communities, it may
be necessary to add an upper income bound. For example, under this formula, in
Loudon County, Virginia, where the median household income tops $134,000, a
household making $108,000 a year – nearly double the national median – would be
treated as low income. And while the cohort eligible to receive discounts could
be too broad, the discounts themselves might be insufficiently generous. To
ensure that discounts are useful for low-income homeowners, rather than a
single cap calculated as a percentage of area median income, discounted rates
should be calculated as a percentage of the policyholder’s own household

Among the reasons that a means-tested affordability program
long has been needed is that the NFIP’s existing policy subsidies, which
Congress set on a path to phase out in 2012, disproportionately benefit
wealthier areas. As the Government Accountability Office (GAO) reported in 2012, 29
percent of subsidized policies were in counties in the top decile of median
household income and 65 percent were in counties among the top three deciles.
In contrast, just 4 percent of subsidized policies were in the bottom decile
and just 10 percent in the bottom three deciles.

The program’s existing subsidies also flow from inland areas
to coastal counties. As the Congressional Budget Office (CBO) reported in 2017,
85 percent of NFIP properties exposed to coastal storm surge pay less than full
risk-based rates. According to the CBO, 29 percent of all Zone V properties are
subsidized, because the properties were in place before flood maps were created
for those communities, while 69 percent of Zone V properties are grandfathered,
and pay Zone A or Zone X rates, despite their exposure to coastal storm-surge
risk. Those totals include the 13 percent of Zone V properties that are both
grandfathered and subsidized.

Ensuring that lower-income policyholders are not burdened
with unreasonably high rates is crucial to carrying out the goal of phasing out
the NFIP’s subsidies and grandfathering. The Homeowner and Flood Insurance
Affordability Act of 2014 placed all subsidized properties on a glide path
toward actuarial rates, with annual premium increases that are capped at 15
percent. That bill also specified that properties newly mapped into special
flood hazard areas receive preferred risk policies for the first year, and then
likewise see annual increases of up to 15 percent until actuarial rates are
achieved. This prevents any future grandfathering.

With the addition of an effective means-tested affordability
program, such as the one proposed in the discussion draft, the committee should
move forward with a plan to place on a glidepath the only cohort of properties
currently scheduled to remain at below-full-risk rates: the pre-2014
grandfathered properties.


The discussion draft would forgive the entirety of the
NFIP’s $20.5 billion debt to the U.S. Treasury. This comes in addition to the
$16 billion of debt that Congress voted to forgive in October 2017. As in the
2017 bill, the discussion draft proposes that this debt cancellation be
recognized as an emergency appropriation.

It is not feasible that the NFIP will ever be able to repay
its debt in full. Of the nearly $40 billion the program has borrowed since
2005, it has, to date, repaid just $2.8 billion of principle. Indeed, as the
CBO reported in 2017, under its current structure, the NFIP is expected to lose
$1.3 billion in an average year, suggesting its debt will only grow larger. All
the borrowed funds have already been disbursed. The only question that remains
is when and how Congress will choose to recognize that expenditure.

The NFIP already has shown that there are fiscally
responsible alternatives to taxpayer borrowing, with its successful transfer of
more than $1 billion of risk each of the past three years to the reinsurance
and catastrophe bond markets. If Congress is going to once again forgive the
program’s debt, and thus relieve the NFIP of the $400 million in annual
interest payments it currently is obligated to make, it remains essential to
cap the program’s borrowing authority. This cap provides an important systemic
prompt for Congress to revisit the NFIP’s structure if it proves once again to
be unsustainable.

While the $1.5 billion cap that was in place from 1996 to
2006 is arguably too stringent, the current $30.425 billion borrowing authority
is so large as to provide no meaningful restriction on spending. A more
reasonable approach would be to allow the program to borrow up to 1 percent of
its total insurance in-force without further congressional authorization. Based
on reported insurance in-force as of December 2018, that would mean a cap of
roughly $13.1 billion.


The discussion draft would raise NFIP coverage limits from
$250,000 to $500,000 for single-family homes and from $500,000 to $1.5 million
for commercial properties. This change would shift onto the NFIP’s balance
sheet coverage that businesses and relatively high-net-worth homeowners
currently obtain through excess and umbrella policies. The current $250,000
limit is more than adequate for most consumers, as it appropriately focuses on
the cost of repair or reconstruction and does not force consumers to buy
additional insurance covering the value of their land.

I am unaware of any evidence that residential or commercial
policyholders currently face any notable affordability or availability issues
in the market for excess flood coverage. In fact, the market for private flood
insurance, including first-dollar coverage, has been growing rapidly. Based on
the most recent statutory
insurance filings
, privately underwritten flood insurance grew by more than
50 percent from 2016 to 2017, from $412.6 million to $623.8 million.

To the extent that members’ concern is the impact of rising
flood insurance rates being passed on in the form of higher rents, a more
narrowly tailored provision raising coverage limits only for residential
multi-family properties would address that issue more directly. Better still,
Congress could consider a rental assistance voucher tied to the income of
renters who reside in affected properties.

It should be noted that excess flood coverage is separate
from the question of privately written first-dollar coverage. With regard to
private flood, we saw in last year’s devastating
caused by Hurricane Florence that just 9 percent of households in
South Carolina and just 3 percent in North Carolina carried flood insurance.
The marketing juggernaut that is the private insurance industry should be
considered a valuable social tool to deploy toward the goal of closing what has
been called “the protection gap.”

One additional step Congress could take to protect consumers,
as the private market continues to grow, is to include a provision that has
passed the House in the past, including unanimously in 2016, stipulating that
consumers who move to private flood insurance and maintain continuous flood
insurance coverage could later return to the NFIP at the same rate as if the
consumer had remained with the NFIP all along. This would protect consumers if,
for example, a private insurer raised rates, changed its underwriting approach
or left the market.

The NFIP remains the nation’s primary source of flood
insurance. But there is no reason to expand the program’s coverage limits or
otherwise crowd out private coverage that already serves consumers well. If we
are to adapt to rising flood risks, both public and private resources will be


We support the aims of the discussion draft on mapping,
which would reauthorize the flood-mapping program and fund improvements to
mapping technology, including the use of property-level Light Detection and
Ranging (LIDAR) surveys. In a
2017 survey
, the Congressional Budget Office found that of the 166 U.S.
counties with expected annual flood claims of more than $2 million, together
representing 89 percent of the NFIP’s $3.7 billion in total expected annual
claims, 83 counties had maps that were more than five years old and 17 had maps
that were more than 16 years old. Furthermore, those 16 counties alone
accounted for 56 percent of the program’s expected annual claims.

Improved mapping is therefore essential not only to the
program’s fiscal sustainability and its ability to charge risk-appropriate
rates, but these improvements also are needed to ensure that homeowners,
businesses and potential developers are not misled about the flood risks that properties
are likely to face. I welcome the committee’s commitment to invest in updated
flood maps, though I have questions about some provisions of the draft legislation.

In the section dealing with privacy requirements, the bill
would prohibit the FEMA administrator from disclosing personally identifiable
information to the public. Given that property ownership records are readily
available from municipal clerks, my concern is that this could be construed as
prohibiting property-level flood risk surveys from being publicly available.
While it is appropriate to balance privacy and transparency interests, there is
general consensus about the need to disclose flood risk. The results of these
surveys should be available to consumers when they are shopping for a home, to
city planners and zoning boards when they are evaluating development projects
and to private insurance companies when they are evaluating whether to
underwrite flood risks.  

Separately, the bill lays out a process for LIDAR surveys to
be employed in the removal of low-risk structures from flood hazard areas “en
masse.” Certainly, it is likely that updated maps will reveal some properties
that are inappropriately designated under the old maps. However, it is striking
that the bill does not contain a parallel provision laying out a process for
the “en masse” inclusion of previously undesignated properties into flood
hazard zones. A
February 2018 study
published in the journal Environmental Research Letters found that roughly 41 million
Americans are at risk of riverine flooding, more than three times FEMA’s
current estimate of 13 million. Combined with the projected increased risk of
both coastal and riverine flooding from sea-level rise, heavier winter rains
and other impacts of climate change, we should expect on balance that more
accurate mapping will result in more properties being added to flood hazard
areas than would be removed.


Finally, I wanted to offer for the committee’s consideration
a proposed reform intended to ease the process of adaptation to increased
coastal flooding and tropical storms that we expect to face as a result of sea
level rise and climate change. Over the next century, we may be forced to
contemplate relocating potentially hundreds of thousands of Americans to higher
ground, should the Intergovernmental Panel on Climate Change’s projections
prove accurate. As a first step, it is critical that Congress reverse any
federal policy that actively encourages Americans to move into harm’s way.

Toward that end, the NFIP should cease writing coverage for
any new construction in 100-year floodplains. The approach would be modeled on
the success of the Coastal Barrier Resources System (CBRS), a 37-year-old
program that bars federal subsidies to development across a 3.5-million-acre
zone of beaches, wetlands, barrier islands and estuaries along the Atlantic
Ocean, Gulf of Mexico and the Great Lakes. The law, signed by President Ronald
Reagan in 1982, does not actually prohibit development within the CBRS. It
merely prohibits programs like federal disaster relief, highway funds and the
NFIP itself from operating in these areas. As a result, more than 80 percent of
the CBRS zones remain undeveloped.

Not only has the CBRS been successful in preserving fragile
coastal habitats and ecosystems, but it has done so while actually saving
taxpayer funds. According to a forthcoming study from researchers Andrew Coburn
and John Whitehead that will appear in the Journal
of Coastal Research
, between 1989 and 2013, $9.5 billion of federal
expenditures were avoided due to the CBRS. The researchers attribute the bulk
of that total to foregone FEMA disaster funds, with avoided expenditures by the
Department of Transportation, the Environmental Protection Agency and the
Department of Housing and Urban Development contributing smaller totals.

The study does not consider the cost of NFIP claims avoided
due to the CBRS, but a stark example was provided by 2017’s Hurricane Harvey.
While Harvey’s nearly $9 billion in NFIP claims were concentrated in and around
the City of Houston, the storm actually made landfall some 200 miles away at
San José Island, an uninhabited barrier island entirely within the CBRS. Much
of the coastal regions of surrounding Aransas County likewise fall within CBRS
units and are thus largely free of development. It is impossible to know what development
near Port Aransas might have looked like in the absence of the CBRS, but it is
certainly conceivable that the devastation caused by Harvey could have been far

This model of promoting conservation by removing federal
subsidies has been adopted successfully elsewhere, including by several public
insurance programs. The U.S. Department of Agriculture employs a version of it
with its “swampbuster” and “sodsaver” conservation compliance programs, which
limit subsidies that could serve as incentives to convert wetlands and highly
erodible land to agricultural use. The State of Florida also adopted this
approach in 2014, when it moved to prohibit new construction seaward of the
state’s Coastal Construction Control Line (CCCL) from receiving subsidized
insurance from the state-run Citizens Property Insurance Corp.

As with the CBRS, barring new construction in 100-year
floodplains from NFIP eligibility would not foreclose the possibility that
developers could find private insurers willing to sell coverage for an
appropriate risk-based premium. It also would not relieve the challenges we
will likely face in the years ahead with the stock of existing structures
already in those zones. It would, however, apply the ancient wisdom of the
Hippocratic Oath: “first, do no harm.” Where we can cease encouraging
development of flood-prone land, without laying any new burden on any current
resident, it is an opportunity we simply must take.

With that, I would be happy to answer any questions.

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