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NFIP reform highlights political divisions

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The failure of an effort to ensure private flood insurance coverage will be deemed comparable to government-provided insurance highlights the ongoing difficulty of reforming the National Flood Insurance Program despite its mounting debt and bipartisan recognition of the need for reform.

Legislators in the U.S. House of Representatives included a provision to clarify that mortgage lenders could accept private flood insurance in lieu of federal coverage to satisfy the mandatory purchase requirement in a must-pass bill to reauthorize the Federal Aviation Administration ahead of this past Saturday’s deadline. But the U.S. Senate stripped the provision after senators Bill Cassidy, R-Louisiana, and John Kennedy, R-Louisiana, offered an amendment that removed the Flood Insurance Market Parity and Modernization Act from the FAA reauthorization bill.

“Everybody seemed really bullish that things were going to happen and then they didn’t on the flood side,” said Tom Dawson, a New York-based partner and co-chair of the insurance regulatory and transactional team at Drinker Biddle & Reath L.L.P. “The democrats seem to really have a thing about privatization efforts for flood. The rhetoric has always been about cherry picking and I think they have convinced themselves that privatization is simply a cover for private insurers to come in and take the best risks out of the program and leave the NFIP with the worst risks.” 

The flood language, commonly referred to this year as the Ross-Castor bill after sponsors Dennis Ross, R-Florida, and Kathy Castor, D-Florida, passed the House last year by a vote of 419-0 and was adopted by the House Financial Services Committee in June by a vote of 58-0. 

The provision was stripped so that it would be included in comprehensive NFIP reform and reauthorization, according to a joint statement issued by the senators on Thursday, but many observers said the provision had become a political bargaining chip in the broader conversation about flood insurance reform and the role of the private sector in providing additional coverage — a frustrating development for stakeholders who view the Ross-Cantor language as merely a correction.

“We strongly support it,” said R.J. Lehmann, senior fellow for the conservative R Street Institute think tank in Washington. “At the same time, we think it’s largely a technical correction. What it offers is some clarity both to policyholders who are thinking about getting a private policy and to the lenders about what counts.”

“I still think it will end up becoming law,” he continued. “I think this is an unfortunate bit of political maneuvering that isn’t really on the substance of the policy, but I think (Senate Minority Leader) Chuck Schumer knows this is something he can trade for in a future negotiation so why give up anything right now if you don’t have to.”

“There’s no logical reason in practice for the senate to view this as controversial in any way — it’s not controversial,” 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. “Politics as usual, I get it.”

“But if the Senate doesn’t make the technical correction, then they create a condition where we could see chaos ensue in the flood marketplace,” he added.

Congress adopted a short-term extension of the NFIP until Dec. 8, by which it will have to contend with the fact that the program’s $24.6 billion deficit could almost double due to losses caused by Hurricanes Harvey and Irma, which struck the three states with the highest penetration of NFIP coverage.

Hurricane Maria, which devastated Puerto Rico and the U.S. Virgin Islands, is not expected to have as significant an impact on the NFIP deficit because of limited policy purchases. Only 5,651 policies with written premiums about $5.6 million were in force in Puerto Rico while 1,439 policies with written premiums of $1.8 million were in force in the Virgin Islands as of June 30, according to Federal Emergency Management Agency data.

“It’s going to be substantial, even with low take-up in Puerto Rico,” Mr. Dawson said of the expected growth in the program’s deficit.

 “I think it raises attention to the fact that we have set federal policy that encourages people to move into harm’s way, that that has been unsustainable as shown by the debt,” Mr. Lehmann said. “But at the same time, memories are short and within a few months people won’t be thinking about (the storms) again. It’s a pretty small window.”

“Ross-Cantor should be at the top because it should be the least controversial,” he said in listing provisions that should be included in any flood insurance reform package. “We think continued support for mitigation, mitigation grants and assistance to help reduce risks, has to be near the top of the list. We want to continue to look at issues like new construction and repetitive loss properties. Without causing great distress to people living in their homes and paying their bills in good faith, we want to make sure that we aren’t providing excessive encouragement to build or stay in harm’s way.”

Although controversial, the recent storms have shone a light on the need to address the risk of repetitive loss properties, which comprise just 1% of the claims filed through the NFIP, but have historically accounted for between 25% and 30% of the program’s losses, according to data from the Pew Charitable Trusts in Washington.

“They keep rebuilding and rebuilding homes that should never have been built in the first place,” Mr. Poulton said.

But even with bipartisan support for some reform provisions, comprehensive overhaul is going to be a big lift, experts say.

“What you’ve just seen is foretelling what we’re going to see in December,” Mr. Dawson said. “There’s going to be a lot of controversy about privatization. If there is some additional expansion of privatization, I think it’s going to be limited. There’s a lot of rhetoric here. There’s a lot of political posturing. Even if they are a lot of flood losses, even if the NFIP is further in debt … will there be broad-based support on raising rates? We tried that a few years ago. It didn’t work so well. Congress did an about face. That’s probably politically difficult and wholesale privatization is probably going to be difficult as well.”

FEMA’s borrowing authority will likely have to be increased before Dec. 8 to pay storm claims, which provides another opportunity to pass either the flood parity provision or additional reforms, Mr. Lehmann said.

“We’ll see how that goes,” he said. “There’s going to be some concern, particularly on the Republican side, about raising the borrowing authority. Those concerns can begin to be addressed if Congress were to pair it with reforms that protect taxpayers at the same time.”