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Principles could guide federal flood insurance reform

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Principles could guide federal flood insurance reform

A U.S. House of Representatives subcommittee has released a draft set of principles to reform the National Flood Insurance Program.

The draft Principles for Flood Insurance Reauthorization and Reform were issued by the House Financial Services Housing and Insurance Subcommittee, which will debate legislative fixes to the financially stressed program — set to expire in September 2017. 

The principles are “encouraging” and “constructive” starting points that address both the need to reauthorize the program for as long as possible to provide market stability and to reform it in a way that encourages the private sector to participate in covering flood perils, said Tom Santos, vice president for federal affairs for American Insurance Association in Washington.

“It’s clear to me these principles are guided by those two themes,” he said.

The program likely cannot generate sufficient revenues to repay the billions of dollars borrowed from the Treasury Department to cover claims from hurricanes in 2005 and 2012, with the Federal Emergency Management Agency, which manages the program, owing the department $23 billion as of Dec. 31, 2014, according to a 2015 report by the Government Accountability Office. In 2014, the Homeowner Flood Insurance Affordability Act reinstated certain premium subsidies and slowed down premium rate increases to address affordability concerns for certain property owners, but may also increase the program’s long-term financial burden on taxpayers, according to the report.

The program obviously has some political and social issues that result in its premium-setting framework not always reflecting the risk, Mr. Santos said. Moving rates toward better risk-based modeling and exploring the use of reinsurance will be critical to improving the program’s fiscal footing — an effort that must also incorporate mitigation, resilience and community planning mechanisms to address the perils faced by riskier properties, he said.

“All of those pieces are needed to address the bigger problem that I think we sometimes forget about: getting people to buy flood insurance,” he said.

Mr. Santos was encouraged by the early publication of the principles, which could lead to quick action on reforming and reauthorizing the program in 2017, as opposed to previous years when the program’s future was uncertain close to its scheduled expirations.

“This is a long-term issue that’s going to have to be addressed,” he said. “I think insurance markets will respond, but I think they will respond more slowly than folks would like.”

Other trade associations also welcomed the release of the principles, which they see as encouraging more private-sector participation and consumer choice.

“These thoughtful principles are an encouraging sign that Congress understands the importance of providing market stability through reauthorizing the NFIP well before the Sept. 30, 2017, deadline for reauthorization,” said Nat Wienecke, senior vice president, federal government relations at the Property Casualty Insurers Association of America in Washington, in a statement.