The ‘unintended consequences’ of flood insurance reform
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