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A bill to reauthorize the National Flood Insurance Program for five years would cap annual rate increases at 9% and establish “guardrails” around a new approach to rating flood risk announced by the Federal Emergency Management Agency earlier this year.
The bill would extend the program until Sept. 30, 2024, and provide for continuous operation in the event of a government shutdown, according to a summary of the bill’s provisions. The NFIP was set to expire in December amid the funding impasse that shut down much of the federal government, but FEMA initially decided to limit the program amid a lapse in appropriations before reversing that decision.
The Senate bill would also end “runaway premium hikes” by capping annual rate increases to 9%, according to the summary. “Currently, premiums can increase by up to 25% a year — in perpetuity, which depresses property values, creates affordability challenges and discourages participation in the program. This will put guardrails on FEMA’s new, unproven rating methodology, known as Risk Rating 2.0, and prevent a rate shock that (would) undermine and weaken the flood insurance program and put taxpayers on the hook for even more disaster assistance grants.”
In March, FEMA announced adoption of an approach to rating flood risk — dubbed Risk Rating 2.0 — that experts say can more accurately capture an individual property’s true risk of flood and price that risk more appropriately. But in June, Rep. Maxine Waters, D-Calif., chairwoman of the U.S. House of Representatives Financial Services Committee, vowed to resist efforts to significantly raise premiums.
“I think this bill strikes a fair balance between the financial integrity of the National Flood Insurance Program for policyholders,” John Kennedy, R-La., and a co-sponsor of the Senate bill, said at a press conference on Tuesday. “It doesn’t do any good to offer flood insurance to people if they can’t afford it.”
The new rating system for the NFIP may cause some short-term pain for buyers of flood coverage but is a necessary step toward putting the program on sound financial footing, experts say.
“Significantly decreasing the legal cap on annual premium increases would provide additional subsidies to high risk areas, further sending a price signal to developers and planners that it’s affordable to live there and therefore the risk is low,” Laura Lightbody, director of the Flood-Prepared Communities initiative of the Pew Charitable Trusts in Washington, D.C., said in expressing concerns about the bill’s provisions via email on Tuesday. “This would further grow the federal governments’ risk and continue to keep and put new people and homes in harm’s way. Additionally it will further erode the financial footing of the program, jeopardizing FEMA’s ability to pay claims for future floods. FEMA should move forward with Risk Rating 2.0 so that rates reflect flood risk and Congress could put forward a targeted affordability proposal to run in tandem for those who simply cannot afford it.”
The bill would also exclude catastrophic loss years in the average historical loss year calculation in accordance with accepted actuarial principles. But doing so “completely ignores the facts: floods are more common and costly, the seas are rising, the climate is changing,” Ms. Lightbody said. “We are basically saying, these events didn’t happen and we aren’t planning for them to happen in the future.”
There are some “good” provisions with respect to mitigation, Ms. Lightbody said.
The bill would temporarily freeze interest payments on the NFIP debt, which will free up about $400 million per year to “invest in more cost-effective mitigation efforts and affordability measures, thus addressing the main drivers of the NFIP’s insolvency,” according to the summary.
The bill would also authorize nearly $400 million per year for the National Flood Mapping Program, according to the summary.
“FEMA does not know the real risks and costs associated with each NFIP policy because they do not have accurate, up-to-date study data and topography information for their policyholders,” the summary stated. “Currently, flood risk maps only exist for about 1/3 of the nation – only 1.2 million of 3.5 million miles of streams, rivers and coastlines have been mapped. Many areas have never been mapped so there is no identification of areas at risk.”
The bill would cap compensation for the Write Your Own insurers at 22.46% of written premiums, while maintaining agent commission at 15% of written premiums, according to the summary. It would also raise the cap on increased cost of compliance coverage from $30,000 to $60,000 to better reflect the costs of mitigation projects and allowing for proactive mitigation before natural disasters strike and excludes any ICC payments from NFIP coverage limits – in line with the House bill.
In June, the House financial services committee unanimously approved a bill that would reauthorize the NFIP for five years and implement reforms and new funding for mapping and mitigation activities. But the bill did not resolve the issue of what to do about the program’s $20 billion debt.
Sen. Kennedy urged his Senate colleagues, particularly Sen. Mike Crapo, R-Idaho, chair of the U.S. Senate Committee on Banking, Housing and Urban Affairs, to take up NFIP legislation. “I think our colleagues in the House have done a much better job of taking action,” he said.
The U.S. House of Representatives adopted disaster relief legislation, H.R. 2157, on Monday that would extend the National Flood Insurance Program to Sept. 30.