The path forward for flood
PIA National VP Ted Besesparis looks at the history of the NFIP and federal flood reform, and offers a pathway forward.
The National Flood Insurance Program (NFIP) has been renewed again, this time until September 30, 2019.
The latest extension of this important program came after another round of brinksmanship on Capitol Hill, ending in a familiar way: with Congress waiting until the last minute before the NFIP was set to expire, before providing a late reprieve in the form of a short-term extension.
In this case, it was two short extensions: the first one for two weeks, followed by another for four months. We will spare you a blow-by-blow account of all the legislative moves that extended through much of May.
This pattern has been repeated countless times over the past 17 years, during which there have been two five-year authorizations of the NFIP enacted. The rest of that time, the availability of flood insurance for most property owners have operated on countless short-term authorizations — except during the handful of times Congress failed to act and the program expired for days or even weeks.
History of program
In the 1960s, PIA (then known as the National Association of Mutual Insurance Agents) led successful efforts to create a federal insurance program providing needed flood coverage for homes and businesses. In fact, PIA members wrote the first 100 policies sold under the National Flood Insurance Program.
The need arose because carriers basically decided that insuring flood risk at affordable rates was not possible and for the most part stopped providing private flood insurance policies in the market. Flood was widely viewed as an uninsurable risk.
Congress was looking for a way to help people by providing a low-cost insurance product, underwritten by the federal government, that would respond to any flooding event — regardless of how local or widespread. It also stated in the enabling legislation that the purpose of the program was to “provide flexibility in the program so that such flood insurance may be based on workable methods of pooling risks, minimizing costs and distributing burdens equitably among those who will be protected by flood insurance and the general public.”
For many years, other than a short period during the 1980s, the program was self-funded, earning about as much in premiums as it paid out in claims. Then Hurricanes Katrina, Rita and Wilma caused billions of dollars in flood damage in 2005 and plunged the NFIP about $19 billion into debt. Seven years later, Hurricane Sandy added another $7 billion in debt.
Congress permits the NFIP to borrow a limited amount of money from the Treasury when the NFIP runs out of money, and Congress has had to raise the NFIP’s debt limit several times.
Philosophical differences
As a result of the NFIP’s growing debt, some lawmakers started to believe that the general public shouldn’t bear as much of the burden of flooding and that the owners of at-risk properties should pay more. Members of Congress thought they should try to move the NFIP to more “actuarially sound” rates.
Of course, the inability of consumers to pay “actuarially sound” rates is what prompted carriers to exit this market all those years ago. Nevertheless, Congress tried anyway.
First came the Biggert-Waters Flood Reform Act of 2012 (BW-12). The resulting movement toward actuarial rates meant consumer premiums increased dramatically. Consumer reaction was swift and powerful, prompting Congress to reverse several of the bill’s provisions through the Homeowners Flood Insurance Affordability Act (HFIAA), passed in May 2014.
Members of Congress can’t seem to agree on a path forward to reform the NFIP, keep it going long-term, and encourage the development of private flood markets because they have a basic philosophical difference over just what the NFIP should be.
To characterize the money that the NFIP needs to secure over and above what it collects in premiums to pay for flood damage as a “debt” to the federal government is a misnomer. The federal government owes this money to itself, because the federal government does not want to provide the increased level of relief to homeowners that is increasingly needed because of the greater frequency and severity of destructive weather in recent years.
The “debt” of the NFIP is, essentially, the disaster relief funds that Congress does not want to appropriate, so they call it something else. Having a federally-backed entity pay interest on this debt back to the federal government completes this circular sleight-of-hand. It makes no sense.
The path forward
The solution to this conundrum, while possible, has several elements. An honest first step would be to forgive the rest of the so-called NFIP debt (Congress forgave $16 billion of it recently). The move to actuarially sound rates should continue, but very slowly and very carefully, with grandfathered rates preserved. You need only look at the pitiful take-up rates of flood insurance in many at-risk areas to see that raising rates significantly and increasing take-up rates can end up being mutually exclusive.
The purchase of reinsurance by the NFIP needs to be expanded and accelerated. We need to continue to encourage the development of a private flood insurance market, with strong consumer protections being overseen by state insurance regulators.
Critical to the success of any reformed flood insurance market is the NFIP, which should be reauthorized for no less than five years, preferably ten. Independent insurance agents and WYO carriers must be kept fully engaged, and no further cuts to their compensation should be considered.
The need for flood insurance is far greater now than it ever has been, because there is far more flood damage with the prospect of even more in the coming years. But all the elements are in place for a broad, bipartisan effort to address this issue long-term. Let’s do it.
Ted Besesparis is senior vice president of communications of the National Association of Professional Insurance Agents (PIA National) based in Alexandria, Va. He can be reached at tedbe@pianet.org.
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