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Lawmakers set to tackle flood insurance program overhaul

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Reauthorization of the National Flood Insurance Program is a top priority of a key U.S. House of Representatives subcommittee, but the program will not be able to pay back its $24.6 billion in debt without major changes to the law, according to one federal official. 

The program is scheduled to expire in September, and there is bipartisan agreement on the need to reauthorize and reform the program but differing views of what the overhaul would entail, according to lawmakers participating in a hearing on the NFIP held by the Housing and Insurance subcommittee on Thursday.

“Our top priority is a timely reauthorization of the National Flood Insurance Program,” said subcommittee Chairman Sean Duffy, R-Wis.

“The NFIP needs an on-time, multiyear reauthorization,” said Roy Wright, deputy associate administrator of the Federal Insurance and Mitigation Administration within the Federal Emergency Management Agency. “The stability of the real estate and the mortgage markets depend on this.” 

“FEMA recognizes that there is a growing interest by private insurers to offer flood insurance protection,” he continued. “FEMA supports this because an insured survivor, whether they get their coverage on the private market or through the NFIP, will recover more quickly and more fully. To these ends, we must realize it will take time for the private market to adapt to the market currently served by a public program. And if the private market were to glean only the lower-risk policies, the NFIP would be left with all of the high-risk policies. This could lower NFIP premium revenue while increasing potential claims payout. Such action would leave the program at even more financial risk.” 

The NFIP currently carries a debt of $24.6 billion dollars, which is serviced through increasingly large interest payments of nearly $400 million per year, according to FEMA. Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 to strengthen the program’s fiscal soundness by addressing discounted premiums and giving FEMA new tools to manage risk exposure, but passed the Homeowner Flood Insurance Affordability Act of 2014 in March 2014, which repealed certain provisions of the reform legislation. 
“To be very plain, given the discounts, the latest subsidies and the grandfathering that are in place today, there’s not a practical way for us to repay this debt,” Mr. Wright said, adding that it would require an “exponential move in policy premiums” to pay normal year claims, respond to prospective catastrophic events and pay down the debts. 

The U.S. Congress must forgive the program’s massive debt, said Rep Maxine Waters, D-Calif., ranking member of the House Financial Services Committee. 

“This agency needs a revolution, and it starts with forgiving the debt,” she said, adding that such a revolution should include the formation of a task force focused on flood insurance alone to “take the agency apart” and understand all the elements involved with rate setting, including the calculations, and correcting historical mapping problems. 

Blaine Luetkemeyer, R-Mo., a member of the subcommittee, called for alleviating the taxpayer burden through reinsurance for the NFIP. FEMA piloted a reinsurance program for 2016 and secured a new placement effective Jan. 1, 2017, through Jan. 1, 2018, through a consortium of 25 reinsurers arranged through Guy Carpenter & Co. L.L.C.

“It was a cornerstone placement that we will be building upon going forward,” Mr. Wright said. “Reinsurance is an important tool, but I do not believe reinsurance can wholly solve for the unmanaged liabilities.” 

The Flood Insurance Market Parity and Modernization Act, a bipartisan bill introduced on Wednesday, clarifies that people who buy private flood insurance should receive the same treatment as those who purchase it through the National Flood Insurance Program if they're trying to obtain federally backed mortgages that require flood insurance. It is part of the effort to spur more private insurance participation in covering flood risks.

The Office of Management and Budget would slash the budget of FEMA and other federal agencies to pay for President Donald Trump’s border wall, according to a report by the Washington Post on Tuesday. Mr. Wright was asked about the potential rate impact of the proposal on NFIP policyholders. 

“It would premature for me to speak about specifics,” he responded, referring questions to the OMB.