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Flood insurance reforms may be modest despite bipartisan backing

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Flood

Bipartisan support for reauthorization of the National Flood Insurance Program bodes well for avoiding a lapse in the program, but differing opinions could lead to a more modest overhaul than stakeholders say is necessary.

The U.S. House of Representatives’ subcommittee on housing and insurance has made the NFIP its top priority, holding two hearings this month to gather information and ideas about reforms for the program, while the Senate Banking, Housing and Urban Affairs Committee conducted its own hearing last week. Stakeholders expect quicker action in the House, with a formal bill possibly introduced in the next few weeks, while the Senate may take a little longer introducing its own bill as it contends with the process of confirming nominees for federal government positions, including the secretaries of the Agriculture and Labor Departments and the U.S. Supreme Court.

While there is clear bipartisan support on the need to reauthorize the program well ahead of its scheduled September expiration, there is less consensus on specific reforms to overhaul the debt-ridden program.  

“I think that means that reauthorization will be a lot more modest,” said Carolyn Kousky, a fellow at nonpartisan research organization Resources for the Future in Washington. “There’s not going to be pricing reform. There’s very little appetite for just increasing grant programs although I think that would be very good for things like pre-disaster mitigation grant programs.”

The NFIP is in debt to the tune of $24.6 billion. While Rep Maxine Waters, D-Calif., ranking member of the House Financial Services Committee, continues to push for forgiving the debt, other lawmakers have promoted an expanded role for the private sector as the solution.

“It’s a big number,” said Tom Santos, vice president of federal affairs for the American Insurance Association in Washington. “It’s complicated both substantively and politically and it’s going to be hard to resolve. Even that said, both (parties) don’t want the program to expire so I think there will be an effort to figure that out in a way that’s constructive, that doesn’t harm the program and that doesn’t continue a program whose financial stability has been in long-term jeopardy.”

But several things need to happen to spur additional private market participation in covering flood risk, experts said.

Private insurers that partner with the federal government to sell NFIP flood insurance policies and help

administer the program must sign an agreement annually that prohibits them from selling a product or products that compete directly with those offered through the NFIP – a non-compete provision that must be removed to encourage more private insurer participation in covering the risk, experts said.

The Flood Insurance Market Parity and Modernization Act reintroduced in Congress earlier this month

clarifies that people who buy private flood insurance should receive the same treatment as those who purchase it through the NFIP if they're trying to obtain federally backed mortgages that require flood insurance.

“The lenders have to be comfortable accepting private flood insurance policies to meet the statutory requirements of the program itself,” Mr. Santos said.

But there are concerns that private insurers will “cherry pick” the most attractive risks, leaving the NFIP saddled with the responsibility of covering some of the riskier properties and locations.

“The NFIP and others rightly bring up the idea that if the private market is allowed to enter unfettered, the private market will write only the best risks and the NFIP will be left with the only worst risks and they say that’s a bad thing,” said Craig Poulton CEO of Salt Lake City-based Poulton Associates, the underwriting manager and administrator of the Natural Catastrophe Insurance Program, a private flood insurer. “Essentially, we’ve been trying to let Congress know that’s not a bad thing; that’s a very, very good thing. You want to call it cherry picking, I would call it market stratification. It’s been done over and over again in this country to the benefit of consumers.”

Concerns have also been raised about President Donald Trump’s budget proposal, which would eliminate the discretionary appropriation of $190 million for the NFIP’s Flood Hazard Mapping Program — seen as an essential tool not just for communities and homeowners, but for the private insurance sector to analyze flood risks. 

“I think that would be pretty bad,” Ms. Kousky said. “Those maps save us lots of money by having in place building codes in these high-flood-risk areas to make sure new construction is at lower risk.”