Congress extends NFIP by one week: What this means for insurers

Congress authorized a 7-day extension of the National Flood Insurance Program (NFIP) on Friday. This is the eighth short-term extension of NFIP in 2018 alone, and the seventeenth extension since 2008.

Congress will need to pass another extension by December 7 in order to continue funding the federal program and to avoid a government shutdown.

In a Q&A, Craig Poulton, president and CEO of Poulton Associates, LLC — which administers the Natural Catastrophe Insurance Program — breaks down the issues with the NFIP and its reform.

Why is it so important that the National Flood Insurance Program (NFIP) is reformed?

The short answer is that postponing or ignoring meaningful reform of the NFIP is the equivalent of doubling down on a bet you know you will lose. Congress has forced American taxpayers to fund well over $45 billion, and counting, in losses on properties insured by the NFIP whereas American taxpayers have funded $0.00 in private flood insurance losses.

Since the NFIP must “take all comers”, it incentivizes the development of structures in environmentally sensitive areas that are guaranteed to experience a flood. This, in turn, requires taxpayers to come up with billions more in unfunded losses as the nation’s ecosystem suffers. Then, we do it all again the next year and the next and the next as it becomes a larger and larger problem with each passing year.

Related: Long-term NFIP reauthorization is essential

Why does Congress seem incapable of agreeing on reform of the NFIP?

In recent years, the House of Representatives achieved the consensus needed to lead the way on NFIP reform, but the Senate has four or five folks who believe that their states will be better off if we continue to require taxpayers to subsidize the building of structures in flood-prone locations. This small group is composed of members of both parties as the divide is geographical, not political.

In fact, the Republicans must abandon fiscal responsibility and the Democrats must abandon environmental responsibility in order to impede meaningful reforms. Ironically, you can find senators championing the findings of the National Climate Assessment in one breath, while inexplicably defending NFIP subsidies in the next. They think they are kicking a can down the road, but it is on its way to becoming a financial grenade. There is a limit to taxpayer patience.

What single reform would be the most beneficial?

The single best thing that can happen is not a reform at all. Even though the NFIP was created to be a mechanism that facilitates private market flood insurance, political forces have converted the NFIP into an inefficient monopoly that overcharges half of its policyholders and undercharges the other half.

Today’s NFIP is almost perfectly tuned to defeat virtually every one of the purposes for which it was created because it has been shielded from competition by federal lending regulators. The cure for most of our flood insurance ailments is the correction of federal lending regulators’ attempts to unreasonably usurp the authority of state insurance regulators.

Once an even playing field is achieved, the invisible hand will act as a vaccine against building where we should not build, bloated flood insurance premiums and the needless abuse of America’s taxpayers.

How urgent is this situation?

This is a ticking time bomb. The legislators who think that our current randomized subsidization of flood insurance premiums is helping their constituents are missing the big picture. They are really setting up their constituents for a future filled with emotional and financial suffering to say nothing of the lives that are placed in jeopardy when we build in flood-prone locations.

Until flood insurance consumers have more choices, as well as more accurate pricing, and until we distribute subsidies based on need rather than chance, we will continue to see many of those who trusted in the wisdom of their elected representatives saddled with financial ruin and we will multiply the number of properties that will have to be abandoned at some time in the future as they become uninhabitable.

Our representatives owe it to all of us to become informed, to use wisdom, to think about the very real consequences of their decisions in the lives of the people who trust them.

Related: Why is long-term re-authorization of NFIP so elusive?