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Lawmakers float 10-year extension of NFIP

Posted On: Apr. 27, 2017 2:43 PM CST

A bipartisan draft proposal floated by two U.S. senators would extend the National Flood Insurance Program for 10 years.

The draft legislation released by Sens. Bill Cassidy, R-La., and Kristen Gillibrand, D-N.Y., would reauthorize the NFIP, which is currently set to expire on Sept. 30 and is in debt to the tune of $24.6 billion, on a long-term basis in hopes of avoiding short-term extensions and program lapses that create uncertainty in the insurance and housing markets, according to a press release issued Wednesday.

The proposal features several provisions aimed at enhancing the affordability and accessibility of flood insurance. For example, the Federal Emergency Management Agency, which administers the program, would be required to reallocate existing surcharges to provide about $400 million per year for flood mitigation activities under the proposal.

The draft bill also aims to shore up the program’s finances by facilitating private sector participation in covering flood risk. For example, it would clarify FEMA’s authority to cede NFIP risk in the capital markets through insurance-linked securities. It stipulates that the FEMA administrator should cede a portion of the flood insurance program’s risk every year to the private reinsurance and/or capital markets at rates and on terms determined by the administrator to be reasonable and appropriate in an amount sufficient to maintain the program’s ability to pay claims and limit its exposure to potential catastrophic losses from extreme events.

The proposal would also allow NFIP policyholders to purchase a private flood insurance policy and switch back to NFIP coverage without losing continuous coverage or grandfathering status.

Congress should consider comprehensive reform covering six areas — outstanding debt, premium rates, affordability, consumer participation, barriers to private-sector involvement and NFIP flood resilience efforts — to improve the program’s solvency and enhance national resilience to floods, the U.S. Government Accountability Office said in a report published on Thursday.

FEMA owes the Treasury Department $24.6 billion, including $1.6 billion borrowed following a series of floods in 2016, according to the report. 

“FEMA is unlikely to collect enough in premiums to repay this debt,” the GAO said in its report. “Eliminating the debt could reduce the need to raise rates to pay interest and principal on existing debt. However, additional premiums still would be needed to reduce the likelihood of future borrowing in the long term. Raising premium rates could create affordability issues for some property owners and discourage them from purchasing flood insurance and would require other potential actions to help mitigate these challenges.”

NFIP premiums do not reflect the full risk of loss, which increases the federal fiscal exposure created by the program, obscures that exposure from Congress and taxpayers, contributes to policyholder misperception of flood risk and discourages private insurers from selling flood insurance because they cannot compete on rates, according to the report. 

“Eliminating rate subsidies by requiring all rates to reflect the full risk of loss would address an underlying cause of NFIP's debt and minimize federal fiscal exposure,” the GAO said in its report. “It also would improve policyholder understanding of flood risk and encourage private-sector involvement. However, raising rates makes policies less affordable and could reduce consumer participation. The decreases in affordability could be offset by other actions such as providing means-based assistance.”

Stakeholders told the GAO that regulatory uncertainty and lack of data is an obstacle to their ability to sell private flood insurance. For example, while lenders must enforce requirements that certain mortgages have flood insurance, some lenders are uncertain whether private policies meet the requirements. 

“Clarifying the types of policies and coverage that would do so could reduce this uncertainty and encourage the use of private flood insurance,” the agency said in its report. “In addition, some stakeholders said that access to NFIP claims data by the insurance industry could allow private insurers to better estimate losses and price policies. FEMA officials said they would need to address privacy concerns to provide such information, but have been exploring ways to facilitate more data sharing.”