The ‘unintended consequences’ of flood insurance reform

October 1, 2013

Hurricanes Katrina and Sandy left about $220 billion in total property damages in their wake. Katrina caused approximately $16 billion in flood damages and required the flood insurance program overseer, FEMA, to borrow from the U.S. Treasury to cover insured losses. Losses from Sandy could push FEMA borrowing from the U.S. Treasury to $28 billion when all claims are paid.

Congress acted in July, 2012 to restore the program to solvency with the passage of the Biggert-Waters Act. Now, as the new flood insurance premiums take effect, an outcry against FEMA and Congress has grown in force.

The new rates are tightly targeted. According to data from FEMA, approximately 250,000 households out of over 5 million households in the program will see substantial premium increases. Insurance Journal drills down more deeply:

The Biggert-Waters act was an attempt to shore up the flood insurance program by moving it towards risk-based pricing. The law eliminates premium subsidies for repetitive loss properties, property owners who do not take steps to mitigate, secondary homes and certain properties that have been protected from risk-based rates by grandfathering.

The NFIP collects more than $3.5 billion in annual premium revenue, and FEMA estimates that an additional $1.5 billion annually is needed from subsidized policyholders for it to get financially even.

FEMA estimates that about 20 percent of its 5.5 million policyholders – about 1.1 million – currently receive subsidies. Under Biggert-Waters, about 250,000 of them will see immediate increases: business owners, those who own second homes and those with frequently flooded properties, according to FEMA.

The Herald Tribune touches on the most important issue:

At the heart of the recent flood insurance changes is a long-simmering debate over whether federal policy is heedlessly encouraging development too close to the water.

Coastal development has significant economic benefits that could be diminished without affordable flood insurance. Residents of older communities built along the water also will struggle with affordability issues.

But many believe cheap flood insurance encourages development that is environmentally harmful and economically unwise.

The effort to move the cost of subsidized flood insurance back to the homeowner will mark an important trend for the federal government. Flood insurance subsidies are unlike healthcare subsidies or welfare, which provide minimum levels of support to individuals and families. It’s true that the flood insurance premium increases will cause hardship for some, and the press has been covering some of the suffering. But as the U.S. reins in spending, some of the parties that have benefited from federal programs will have to shoulder a larger share of the costs.

The co-sponsor of the legislation to get FEMA back to solvency, Representative Maxine Waters, is now lamenting the “unintended consequences” of the legislation. From Insurance Journal again:

A Congresswomen whose name adorns the now-controversial federal flood insurance reform bill passed in 2012 says she wants the law changed to deal with ‘unintended consequences’ including big premium hikes for some homeowners.

Rep. Maxine Waters, (D.-Calif.), co-author along with Rep. Judy Biggert, (R-Ill.), of the Biggert-Waters Flood Insurance Reform Act, released a statement saying she is ‘outraged by the increased costs of flood insurance premiums that have resulted from the Biggert-Waters Act. I certainly did not intend for these types of outrageous premiums to occur for any homeowner.’

Congress will have to sort this out again. If it wants the flood insurance program to be solvent, someone will have to pay higher premiums. If insurance is there to protect private policy holders, it must have the resources to pay claims.


Congress: Representative Waters’ letter on FEMA premium increases

FEMA: Video explaining changes in the flood insurance program

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For Immediate Release
October 25, 2013

Waters Announces Deal to Repair Flood Insurance Program

WASHINGTON, D.C. – Congresswoman Maxine Waters, Ranking Member of the House Financial Services Committee, has announced a bipartisan legislative solution to fix the National Flood Insurance Program (NFIP) and ensure changes are implemented affordably. In essence, the legislation calls for a four-year delay to the program and requires FEMA to complete an affordability study and propose regulations that address affordability issues.

The bipartisan deal comes after several weeks of negotiations with Democrats and Republicans in the House and Senate. On October 9, in the midst of the government shutdown, Waters convened a bipartisan meeting of nearly 20 House Members, as well as Senate staff, to build consensus around an agreement to delay and fix the program. Today, Waters convened a conference call to finalize the legislation.

“Over the past several months, I have felt the harm and heartache that many Americans have already experienced as a result of changes to the National Flood Insurance Program. From the start, I have made clear that I would lead the effort to fix the unintended consequences of the Biggert-Waters Flood Insurance Reform Act,” said Congresswoman Maxine Waters.

Waters added, “Today’s bipartisan agreement is an excellent start. This legislation would ensure FEMA undertakes the implementation of changes to the National Flood Insurance Program in an appropriate way that will not cause harm to homeowners. The centerpiece of this legislation is a four-year delay in most rate increases. This delay would allow FEMA to get their act together by mapping in a manner that is actually accurate, and reimbursing those who can prove that FEMA’s maps were incorrect. In addition, the legislation requires that FEMA complete an affordability study that would report to Congress on how rate increases will affect homeowners, so lawmakers can make an appropriate determination about the implementation of changes in the future. This bill is critical and much needed. I urge House and Senate leaders to take up this measure without delay.”

Legislation will be released early next week in the House and Senate. It will impose a delay likely to total four years for the most vulnerable properties, by delaying implementation of rate increases until two years after FEMA completes an affordability study, which was mandated in Biggert-Waters but not undertaken.

In addition, the legislation requires FEMA to propose regulations that address the identified affordability issues within 18 months after the completion of the study and establishes a six month moratorium thereafter to provide for Congressional review.

The delay applies to: primary, non-repetitive loss residences that are currently grandfathered; all properties sold after July 6, 2012; and all properties that purchased a new policy after July 6, 2012.

FEMA has estimated it will take 2 years to complete the affordability study before regulations can be issued and reviewed by Congress meaning rate increases would be delayed for approximately 4 years in total.

In addition, the legislation:

Allows FEMA to utilize National Flood Insurance Funds to reimburse policyholders who successfully appeal a map determination.
Eliminates the 50% cap on state and local contributions to levee construction and reconstruction
Protects the so-called “basement exception,” which allows the lowest proofed opening in a home to be used for determining flood insurance rates.
Establishes a Flood Insurance Rate Map Advocate within FEMA to answer current and prospective policyholder questions about the flood mapping process.
Requires FEMA to certify that the agency has fully adopted a modernized risk-based approach to analyzing flood risk.

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