National Flood Insurance Program (NFIP) Reauthorization
Proposed Policy: SUPPORT reauthorization of the NFIP with legislative, policy and programmatic modifications to ensure no coverage lapses and to improve the affordability, transparency and financial stability of the program through reforms in the following areas: (1) Affordability/Rate Structure; (2) Mapping/Data Collection/Modeling; and, (3) Mitigation. To that end, FAC SUPPORTS the Sustainable, Affordable, FAIR and Efficient National Flood Insurance Program Reathorization Act (SAFE NFIP) 2017.
Issue Summary: The NFIP is administered by the Federal Emergency Management Agency (FEMA) and allows property owners in participating communities to buy insurance to protect against flood losses. Under federal law, the purchase of flood insurance is mandatory for all federal or federally related financial assistance, including home mortgage loans, for the acquisition and/or construction of buildings in high-risk flood areas (Special Flood Hazard Areas or SFHAs). The NFIP is scheduled to expire on December 8, 2017. If the program is not reauthorized, federally-secured mortgages cannot be issued.
The NFIP is a Federal program created by Congress to mitigate future flood losses nationwide through sound, community-enforced building and zoning ordinances and to provide access to affordable, federally backed flood insurance protection for property owners. The NFIP is designed to provide an insurance alternative to disaster assistance to meet the escalating costs of repairing damage to buildings and their contents caused by floods.
Participation in the NFIP is based on an agreement between local communities and the Federal Government that states that if a community will adopt and enforce a floodplain management ordinance to reduce future flood risks to new construction in Special Flood Hazard Areas (SFHAs), the Federal Government will make flood insurance available within the community as a financial protection against flood losses.
Florida is an important state within the NFIP, as it holds one-third of all policies nationwide (1.75 million out of 4.9 million). For the current year, more than $940 million in premiums will be paid by Florida policy holders. Since 1978, the NFIP has paid more than $38 billion in claims to flood victims, with some 40 percent being paid to Louisiana residents after Hurricane Katrina. In contrast, during the same period, Florida has received $3.6 billion in payouts.
NFIP is reauthorized every three years. In 2012, it was reauthorized through the Biggert-Waters Flood Insurance Reform Act (BW-12) which sought to eliminate the NFIP deficit simply by increasing premiums. The result was that many homeowners saw their premiums escalate to unaffordable amounts. In one case, the premium on a $300,000 home increased from $1,900 to over $49,000.
To address this crisis, the Homeowners Flood Insurance Affordability Act (HFIAA) was passed in 2014. Through HFIAA, rate increases were capped at no more than 18% annually for residential and 25% for commercial properties. For Florida, the 2014 law should be viewed as only a marginal repair to the 2012 reauthorization. For example, the NFIP provides a reduced – or preferred rate – for properties that were built before 1975, when flood maps were not available. However, the 2014 reauthorization left unchanged a modification that does not extend this rate to non-primary residences (i.e., vacation rentals, investment properties, and businesses), which will receive annual 25 percent premium increases until full-risk rates are achieved. Florida has more than 47,000 properties that are subject to these increases, including vacation rental properties that support the state’s tourism industry.
Analysis: At a minimum, FAC believes the following provisions should be included in the reauthorization:
- Broaden the Base of Policy Holders – Spread the Risk - According to FEMA, people located outside of mapped high-risk flood areas file more than 20 percent of all flood claims and receive one-third of Federal disaster assistance for flooding. Recognizing that nearly all properties have some risk of flooding, incentives should be created to encourage participation in the NFIP for property owners not located in high risk flood zones.
- Ensure Rates are Consistent for all Properties - All properties should be treated the same and rated according to their ability to withstand risk, not their use or ownership status.
- Re-evaluate the Role of Write-Your-Own Companies - Through the WYO program, private insurance companies enter into agreements with FEMA to sell and service flood insurance policies. According to a 2007 GAO report, FEMA’s payments to WYO insurance companies for operating costs ranged from more than a third to almost two-thirds of the total premiums paid by policyholders to the NFIP for fiscal years 2004 through 2006. From 2011 - 2014, WYO’s earned $1.3B in profit from the program. The commissions for WYO companies should be reduced.
- Provide a More Reasonable Glide Path if rates must increase - Prior to 2012, FEMA had the authority to increase rates by no more than 10% per year. Under the 2014 Homeowners Flood Insurance Affordability Act (HFIAA), renewal premiums for certain properties (grandfathered and Pre-FIRM) will experience rate increases of between 18 percent and 25 percent until the full risk rate is reached. Meanwhile, the nation’s CPI average has not exceeded 3.22% since 1990, and median incomes adjusted for inflation have remained stagnant. Increases should be capped at 3% to 7%, which would still be more than twice the annual CPI.
- Increase Funding for Flood Mitigation - Congress should increase funding for FEMA’s mitigation programs to help buy down the NFIP risk.
- Improve and Accelerate the Mapping Process - Nationwide, NFIP flood maps are generally outdated and don’t measure a community’s flood risk accurately. Efforts should be made to (1) work directly with communities in the map revision process, ensuring locally-generated data and/or models are considered in map revisions, and (2) ensure individual property data (i.e., Finished Floor Elevations) are accounted for when maps are developed/revised.
- Strengthen the Role of the Flood Insurance Consumer Advocate - Pursuant to HFIAA, FEMA has created a Flood Insurance Advocate to educate and assist property owners and policyholders on flood insurance issues, mapping issues including the map amendment process, and mitigation techniques. However, the authority and responsibilities of this position should be expanded.