U.S. flood insurance program requires multi-year, debt-focused reform, FEMA says

The Federal Emergency Management Agency (FEMA) has had to borrow billions on top of billions of dollars to keep the National Flood Insurance Program (NFIP) afloat, but statutory reform is needed to keep the program from sinking, an agency official testified Thursday on Capitol Hill.

Most recently in January, the NFIP borrowed an additional $1.6 billion from the U.S. Treasury to cover policyholder claims, pay interest on its ballooning debt, and ensure capacity to pay future claims. Liabilities to the Treausury now total $24.6 billion, requiring annual interest-only payments of almost $400 million, an amount the FEMA official said threatens the program’s future.

“To be very plain … there’s not a practical way for us to repay this debt,” said Roy Wright, deputy associate administrator of FEMA’s Federal Insurance and Mitigation Administration, which oversees the federal program. “We need a sound financial framework for the NFIP. We need fiscal solvency.”

Wright testified March 9 before members of the Housing and Insurance Subcommittee of the House Financial Services Committee on what FEMA thinks would improve the effectiveness of the NFIP, which will expire Sept. 30 if Congress doesn’t reauthorize it.

“It’s important to note that nearly all of the flood programs mandated by law – programs to reduce risk, the administrative costs of [third-party programs], and the payment of interest on the debt – are funded solely through the payment of premiums,” Wright said.

In fact, premiums, fees, and surcharges from the 5.1 million policyholders participating in the NFIP help FEMA cover the vast majority of the program’s costs – including operations, floodplain management, risk mapping, and grants – while Congress appropriates funds for flood mapping, he said.

The NFIP could use more pollicyholders paying premiums to generate cashflow. FEMA suggested that the reauthorization should recognize the need to increase flood insurance coverage across the nation. And not just for properties in special flood hazard areas (SFHAs), which must have flood insurance coverage prior to a mortgage being approved by a federally backed mortgage lender.

“Flooding can happen anywhere. Floods are not wholly contained within SFHAs. Over the past 10 years, approximately 20 percent of all NFIP claims come from low- to moderate-risk policyholders,” Wright said. “More people clearly need to be covered. We need to double our efforts to see that done.”
And due to the nature of flooding, impacts can vary significantly each year, he added.

After 15 years of lower-than-expected damages, Wright explained how the current debt exceeded expectations when Hurricanes Katrina, Rita, and Wilma hit the nation in 2005, resulting in an annual NFIP claims total eight times the size of any prior year in the program’s history. Then, Hurricane Sandy struck the East Coast in 2012 resulting in 144,000 NFIP claims, and the establishment of a new program to review rejected claims.

Last year saw multiple flooding events in several states during Hurricane Matthew that resulted in the third largest claims payout year in NFIP’s history. And moving forward, Wright said FEMA anticipates having another loss year within the next decade.

Private insurers
Another reauthorization consideration FEMA suggested is for Congress to encourage a greater private sector role while sustaining a robust and affordable NFIP.

Specifically, FEMA supports increased numbers of private insurers offering flood insurance protection, Wright said, because more insured survivors would be able to recover from a disaster more quickly and fully.

Naturally, he said, this process would take time as the private sector adjusted to working within a market served primarily by a public program.

“Among the ideas to be explored would be identifying a future point in time by which flood policies for all new construction would be provided by the private market. When coupled with ongoing floodplan management and building code enforcement, these new residential structures would be built to insurable levels of risk for the private market,” Wright suggested.

Then, as private markets expand, FEMA could further explore improving options available for NFIP policies, such as including increased policy limits for deck and basement coverage and various deductible levels, he said.

Fast & long
Additionally, reauthorization should be enacted prior to the Sept. 30 expiration date, Wright said, and should extend the NFIP for multiple years. This will provide stability to the nation’s real estate and mortage markets, he said.

And Congress must bring the statutory definitions of “repetitive loss” into alignment so that elements of the NFIP are consistent, Wright said.

“Properties that experience multiple losses have an increasingly adverse impact on the financial stability of the program,” Wright said. “Congress should explore caps on cumulative losses that well exceed policy limits and the value of the structure. As the program moves forward, NFIP premiums should reflect a property’s true risk. The fiscal solvency of the program depends on it.”

Subcommittee Chairman Sean Duffy (R-WI) said he plans to work quickly to get the NFIP reauthorized. And while there is bipartisan support among members to do so, how to get there may be tedious.

Duffy said the program is “absolutely unsustainable” as it is now and members are going to have to “address many egregious claims” made about how the NFIP operates.

U.S. Rep. Emanuel Cleaver (D-MO), ranking member on the subcommittee, worries that if the program expires Sept. 30 without a reauthorization, homeowners won’t be able to buy homeowners insurance or close on buying their homes.

“The threat of flooding impacts all of our country. We need to work to ensure flood insurance remains affordable,” Cleaver said.

U.S. Rep. Maxine Waters (D-CA) said the subcommitte shouldn’t repeat its past mistakes when it reauthorizes the program. It should also avoid unintended rate increases and forgive FEMA’s debt, she added.

“There’s no way you can repay this debt,” she told Wright.

Along those lines, U.S. Rep. Randy Hultgren (R-IL) asked Wright what changes FEMA would make in order to not accrue this type of debt again.

“We need Congress’ help on that front,” answered Wright.