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Legislative drafts start NFIP revamp

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A series of legislative proposals that would reauthorize the National Flood Insurance Program for five years represent a great start to reforming the program but require substantial improvements, according to experts.

The circulated drafts revolve around six key areas of reform: addressing consumer cost and affordability; providing greater private-market access, competition and consumer choice; encouraging flood mapping reforms and fairness; enhancing mitigation efforts for properties that flood frequently; strengthening taxpayer protections; and implementing NFIP claims processing and Superstorm Sandy reforms.

“While we would like to see some changes and improvements, the legislative drafts provide a great start to the process,” Steve Ellis, vice president, Washington-based Taxpayers for Common Sense, testified at a House Financial Services Committee hearing on Wednesday.

For example, the organization supports the proposal’s repeal of the non-compete provisions, meaning elimination of the regulatory restriction that currently prevents insurers participating in the NFIP’s Write Your Own program from selling both NFIP and private flood insurance policies, and provisions to increase rate and subsidy transparency to policyholders. But the organization opposes the “artificial” rate cap in the proposal and urges Congress to target any premium assistance to owners who need it.

The Coalition for Sustainable Flood Insurance is concerned the committee’s proposal to increase the floor for rate increases from 5% to 8% will have a detrimental effect on premium affordability, said Caitlin Berni, vice president of policy and communications with Greater New Orleans Inc. in New Orleans. While the proposal would also lower the overall premium cap to 15% from 18%, the floor increase would have a bigger negative impact as premiums are projected to increase 6.3% this year, she said.

Ms. Berni urged Congress not to increase rates during this reauthorization and pushed back against the notion that taxpayers in some states subsidize the rates of those in more flood-prone jurisdictions.

“This is not just a matter for coastal cities,” she said. “Flooding is the most common natural disaster in the United States, affecting communities in each of the 50 states and territories.”

The National Wildlife Federation is comfortable with the rate increases in the proposals as it is concerned that the NFIP currently does little to discourage development in coastal areas, said Josh Saks, Legislative Director, National Wildlife Federation in Washington.

“NFIP has contributed to this problem by encouraging development in flood-prone areas by charging subsidized rates and masking flood risk,” he said. “In addition, the subsidized rates have failed to send market signals to encourage mitigation.”

Encouraging private-sector involvement

The NFIP was created in 1968 to deal with a perceived lack of available flood insurance and to reduce ad hoc disaster payments, Mr. Ellis said.

“Nearly a half-century on, it is nearly $25 billion in debt and there have been enormous technological innovations that enable insurers to accurately price risk and provide products and coverages unavailable through the NFIP,” he said.

The private sector is already writing first-dollar flood insurance, even in the highest risk areas, Mr. Ellis said, citing at least 19 companies writing private flood insurance in Florida, home to nearly 40% of the NFIP policies.

But the issue of how to deal with the current debt continues to be the subject of partisan debate in the reform talks.

It would not be in the program’s best interest to continue to add debt, said Rep. Emanuel Cleaver, D-Mo.

“There should be a way for us to get that debt out of the way, have it forgiven and start over,” he said, adding that the program should also be extended for 10 years to give the real estate industry and the U.S. Federal Emergency Management Agency some stability.

However, Rep. Sean Duffy, R-Wis., chairman of the Housing and Insurance subcommittee, questioned whether forgiving the current debt would actually keep the program out of debt going forward.

“One of the largest losses in the program’s history was just last year, when really the only storm people can think of was Hurricane Matthew,” Mr. Ellis said. “While it does teeter on the brink of solvency, these larger events are going to drag it down. Forgiving the debt doesn’t mean the program’s solvent. It just means it continues to run deficits, even if the debt is forgiven.”