Pitfalls Ahead for Flood Insurance Reform in 2017
WASHINGTON — Lawmakers are preparing to deal with flood insurance reform next year, another in a seemingly never-ending attempt to resolve recurring problems, and they will once again have to confront a series of challenges.
Those include communities and individual properties that repeatedly flood, how climate change could boost demand for the program and creating a private market for flood insurance so the government isn't always on the hook.
Congress is scheduled to take up tax reform early next year and to turn to flood insurance reform probably in the spring before the National Flood Insurance Program expires on Sept. 30.
One key issue is what to do about the roughly 30,000 properties that have been flooded over five times on average, representing 0.6% of properties that receive coverage under the program and 10.6% of all claims paid during its history.
Lawmakers could opt to try and buy those properties and prevent them from continually draining the program.
"It would cost about $2 billion to buy out those properties that are still insured, unmitigated, and at-risk" of flooding again, said Rob Moore, a senior policy analyst of the Natural Resources Defense Council, at a National Housing Conference event earlier this month. That's not "an unreasonable amount considering these same properties have already collected about $2 billion in flood claims."
But the program currently doesn't have that kind of money, as it is currently $23 billion in debt to the U.S. Treasury. Congress used to pay off the debts every year, but that stopped in 2005 after Hurricane Katrina, said Roy Wright, deputy associate administrator for insurance and mitigation at the Federal Emergency Management Agency.
There are growing fears, too, that the program's problems are only going to get worse, due to climate change and rising sea levels, which will put an increasing number of homeowners at risk of flooding.
"The flood insurance program is really an important lever for making sure those people can recover in the wake of floods," Moore said.
In August, over 100,000 homes north of New Orleans were damaged by heavy, sustained rains. The Washington Post reported that the "no-name storm" dumped three times as much rain on Louisiana as Hurricane Katrina.
To deal with this growing risk, lawmakers want to encourage the development of a private flood insurance industry to take some of the pressure off the federal program.
Last April, the House passed a bill by 419-0 vote to allow Fannie Mae and Freddie Mac to accept private flood insurance policies for the first time. Despite the overwhelmingly bipartisan vote, the bill sponsored by Rep. Blaine Luetkemeyer, R-Mo., died in the Senate.
Senators raised concerns that the government-sponsored enterprises would not be able to take reasonable steps to protect themselves against inadequate flood insurance coverage on properties. In 2017, that issue will be on the table again.
Luetkemeyer recently issued a statement of principles for flood insurance reform in 2017 that encourages the development of a private flood insurance market and provides for contingent buyouts of properties with repetitive flood losses.
Under his proposal, the owner would be offered affordable flood insurance at a reduced rate in return for their commitment to accept a buyout in the future if their property is heavily damaged in a flood. It could happen two days after the buyout agreement is signed or whenever the next flood hits. The buyout would provide the owner with enough assistance to relocate.
"It is consistent with the proposal we are developing," Moore said in an interview.
The American Bankers Association has also welcomed the congressman's statement of principles on the re-authorization of the flood insurance program.
"We are particularly pleased that Chairman Luetkemeyer is focused on ensuring stability in the NFIP by beginning the reauthorization early and avoiding any risk of the lapses in the program authority that have harmed borrowers and lenders in the past," said ABA Executive Vice President James Ballentine.
Between 2008 and 2012, the flood insurance program was temporarily extended 17 times due to legislation disputes and congressional authorization for it lapsed four times.
ABA also applauded Luetkemeyer's focus on "encouraging a robust private flood insurance market and the development of risk transfer mechanisms to limit taxpayer liability, as well as his proposal to eliminate mandatory NFIP coverage for large commercial properties," Ballentine said in a Dec. 6 statement.
The Luetkemeyer principles also call on FEMA to purchase reinsurance to reduce its flood risk exposure.
"If we are going to put this program on a firm financial footing, we have to find ways to leverage the capital markets," Wright said at the NHC event.
He noted that FEMA has already started to purchase re-insurance in the private market. In its first transaction, the agency purchased $1 million of reinsurance on a contract that expires in March 2017. Once claims exceed $5 million, FEMA would be able to collect for the next $1 million in claims, according to Frank Nutter, president of the Reinsurance Association of America.
"Their stated intention was to go through the whole process of selecting a broker, buying the reinsurance premium, having a claim on the reinsurance and collecting a claim. They got the protocols all in place," Nutter said in an interview. FEMA is in the "market now for a more significant level of re-insurance protection."
Jimi Grande, the senior vice president of federal and political affairs with the National Association of Mutual Insurance Companies, said some carriers are interested in expanding into private insurance policies. But he warned that it is very hard for a private market to emerge because the federal program doesn't charge risk-based premiums.
"If reforms increase flood insurance premiums, it will reduce properties' values in whole towns that are judged to be riskier than before," Grande said in an interview.
In the past it has been very difficult to get large-scale flood reform through the House and Senate, according to Jenn Fogel-Bublick, a partner and lobbyist at Capitol Counsel in Washington who represents the SmarterSafer Coalition.
"I believe there is enough support to make sure private sector participants can write private flood insurance policies. I do believe that will be part of any large package" she said.