Congress proposes reforms to federal flood insurance

Here is a copy of the Congressional Research Service report on proposed reforms of the National Flood Insurance Program.  Don’t worry, it’s short, and the last few pages are a table summarizing provisions.  Some of the proposed changes make good sense: raising the limit of flood insurance policies and contents coverage, allowing FEMA to charge actuarially sound rates for commercial and non-primary residences (primary residences will continue to be subsidized across risk classifications, however); dramatically increase the penalties for lenders that don’t require flood insurance in flood plains; and new lines of coverage including business interruption insurance. 

But look at the list of concerns identified with the NFIP, and see how the proposals fall far short of addressing all of them: 

  • increased need to borrow from the U.S. Treasury; the need for the program to bring in sufficient premiums to cover the federal outlays of funds used to pay claims;
  • substantial premium cross-subsidies among classes of policyholders;
  • outdated flood maps that will form the basis for making decisions about where and how to rebuild the Gulf Coast, and the need to modernize them to more accurately reflect flood risk nationwide;
  • costly impact of repetitive loss properties;
  • allegations of uneven compliance with mandatory flood insurance purchase requirements when the property is located in federally designated special flood hazard zones (SFHA);
  • inadequate management and oversight of private insurance companies (Write Your Own insurers) that write insurance policies and adjust claims for the NFIP, vendors that supply services to the program;
  • inadequate education, training, and technical assistance for private insurance agents and adjusters; and
  • federal government long-term exposure to potential changes in weather-related risk, which could have significant implications for the nation’s growing fiscal imbalance.

One of the biggest of these is repeat losses on the same property, where owners keep getting a de facto subsidy instead of relocating.  This was supposed to have been changed in the last reform, but the problem continues.  Also not completely addressed is cross-subsidies among classes of policyholders — FEMA still won’t be able to charge actuarially sound rates for primary residences. Also, the NFIP owes the Treasury some $20 billion, and the program generates insufficient capital to create its own reserves, much less repay an enormous sum like that.  The report acknowledges debt forgiveness has to be considered, but that is not in this bill at present.

You might also notice inadequate supervision of the Write Your Own companies is listed, probably as a sop to those who insist private insurers ripped off the Treasury by transferring their obligations for wind damage to the taxpayers by wrongly paying out flood damages.  Yet the bill itself doesn’t appear to address that concern.  I wonder why not?

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2 Responses to Congress proposes reforms to federal flood insurance

  1. National Flood Insurance Programn

    If you are keeping a list of national disgraces, your list is incomplete unless it includes the federal National Flood Insurance Program. The NFIP is set up and run in a way no state insurance commissioner would allow a real…

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