Basics

Proposed Legislation

Basics

 The NFIP was created in 1968. It has been amended several times, in order to identify properties at risk, establish communities that comply with floodplain management regulations and establish rates affordable enough for insureds to buy coverage, since coverage is generally not available in the private market. The private market could not price coverage affordably and have rates that were actuarially sound. This is part of the problem, that rates have been discounted to the extent that the program is seriously in debt.

 Also, properties in flood prone areas have been repeatedly flooded and had claims paid. The program was changed so that such properties prone to repetitive claims are designated as such. Once a property is so designated, it can then be required to be relocated or demolished. It makes no sense for properties in areas known to be at high risk for flooding and that have already been repeatedly flooded to continue to be insured.

 In order to receive flood insurance, communities must be recognized by FEMA and the community must apply to join the program and set up flood management standards to help avoid or mitigate future flooding. Communities in such areas that choose not to participate in the program may find that their access to grants, loans, or guarantees by various federal agencies are no longer available or are severely restricted.

 A "Write Your Own" program was established in 1983 to encourage private insurers to participate in the NFIP. In this program carriers write the policies under their own names, collect premiums, keep a percentage for costs and commissions, and invest the rest of the premium. The carrier then services the policies and pays claims. The government is responsible for any underwriting losses, so the carriers are not exposed to losses the way are they with their regular book of business.

 There are of course strict eligibility requirements for properties in order to qualify for flood coverage. Properties must have two or more exterior rigid walls, be roofed, have 51 percent of its actual cash value above ground level. Contents are eligible as well, and contents in buildings without rigid walls on all sides must be secured to prevent being floated out of the property in event of a flood. Mobile homes must be on permanent foundations and not on slabs. If in a Special Flood Hazard Area (SFHA), they must be anchored by over-the-top or frame ties to ground anchors, or anchored according to manufacturer specifications or in accordance with the community floodplain management requirements.

 Proposed Legislation

Senators Cassidy and Gilibrand have proposed draft legislation that would reauthorize the NFIP until 2027. Reauthorizing it for ten years would avoid uncertainty in both the housing and insurance markets. It is the Flood Insurance Affordability & Sustainability Act of 2017. The act includes steps to improve financing, provide premium assistance, encourage private market access, improve mapping techniques and accuracy, increase accountability of NFIP contractors, increase accountability of engineering and litigation costs to ensure costs are billed appropriately, simplify the claims appeal process, ensure that earth movement will not be used as an exclusion when such movement is caused by flood, and other actions. A summary can be found here: https://www.cassidy.senate.gov/imo/media/doc/Cassidy-Gillibrand%20Section%20Summary%204_25_17_%20FINAL.pdf

 Another bill, the Flood Insurance Market Parity and Modernization Act (H.R. 1422/S. 563) introduced by Representatives Ross and Castor and Senators Heller and Tester, clarifies regulators' roles over private flood insurance, provides a clear definition of private flood in order to clarify language, which will hopefully prompt more insurers to enter the private flood market.. Additional private carriers in the market would provide consumers with more access and options to flood insurance. This additional coverage would help lessen the strain on taxpayers to fund NFIP.

 They also recommend reauthorizing FEMA and reinstating rules to allow policyholders to cancel their flood policies mid-term if they replace coverage with private flood policies. They would receive a pro-rated refund of unused premium. Increased mitigation efforts are supported as floods are an ongoing issue.

 Meanwhile Senator Kennedy is filing a bill that will give FEMA power to fire engineers and other consultants if they mishandle insurance claims under NFIP. This bill became necessary when it was realized that consultants who were criticized in the handling of Hurricane Sandy claims continued to handle later claims from different flooding in Louisiana. Under this new bill FEMA would be allowed to establish rules for removing consultants, as well as an appeals process for consultants accused of wrongdoing. Resulting from an episode of "60 Minutes" in which engineering reports were questioned, thousands of Hurricane Sandy claims were reopened by FEMA.

 In April the Government Accounting Office (GAO) released a report encouraging comprehensive reform of NFIP in order to make it solvent. One of the biggest challenges is keeping coverage affordable while maintaining solvency, almost an impossible task as actuarially sound rates are very expensive in the most vulnerable areas. The report recommends action in six areas. These areas are outstanding debt, premium rates, affordability, consumer participation, flood resilience efforts and other barriers to private-sector involvement. The report acknowledges that there are challenges inherent in these reforms, some which for a time could increase costs for the government, private sector or property owners. However, addressing the issues identified in the six areas presents the best opportunity to address the current issues with NFIP. The full report can be found here: //www.gao.gov/assets/690/684354.pdf