Congress Should Reform NFIP

Authorization for the nation’s primary flood insurance, the National Flood Insurance Program (NFIP), expires November 30. Unless Congress acts to reauthorize or reform, the NFIP will stop issuing new policies. The NFIP remains chronically underfunded due to a structural imbalance in its finances. Instead of passing yet another status quo extension, Congress should act to address NFIP’s financial issues.

The Federal Emergency Management Agency (FEMA) administers NFIP, which is composed of three major activities: flood insurance to properties with significant risk, flood mapping to determine that risk, and floodplain management to set standards and mitigate risk. NFIP is voluntary in the sense that communities choose to participate in NFIP and adopt NFIP standards. If a community adopts NFIP, however, flood insurance is generally required to get a mortgage.

According to the Congressional Research Service, the NFIP had over 5 million flood insurance policies providing nearly $1.28 trillion in coverage as of February 2018. The program collects about $3.6 billion in annual premium revenue. If the NFIP premiums do not cover the claims made—which is increasingly the case—the NFIP suffers losses and must borrow from the Treasury.

Three Major Shocks to NFIP

Even before the intense 2017 hurricane season, the NFIP owed more than $24 billion. Hurricanes Harvey, Irma and Maria in 2017 made for a catastrophic year of flooding, with over $8 billion claims in 2017. Congress limits the total amount the NFIP can borrow to $30.5 billion. The NFIP would have exceeded its borrowing limit in the wake of the 2017 hurricane season, but Congress canceled $16 billion of its debt in October 2017 in one of the disaster relief laws it enacted after the hurricanes. This was the first time NFIP debt was canceled and was the largest reduction in debt owed under the program.

NFIP Debt Would Be Higher Without Forgiveness

NFIP is unlikely to repay its debt under current policy. The GAO notes that if interest rates continue to rise NFIP may not be able to retire any of its debt  even in years with no major losses. Second, the Congressional Budget Office (CBO) estimated expected claims and found it was $1 billion, or 37 percent, higher than FEMA’s estimate, suggesting FEMA may be underestimating what premiums ought to be. Third, FEMA has limited authority to increase premiums. A large number of premiums are subsidized, irrespective of a property owner’s income or ability to pay.

In January 2017, FEMA paid $150 million for $1 billion of reinsurance. The reinsurance contract covered about a quarter of losses from a single flooding event if the event generated losses between $4 and $8 billion. Hurricane Harvey triggered a full claim on the reinsurance, saving the program approximately $900 million more than if they did not buy reinsurance.

In the FY 2019 President's budget, the administration proposed a means-tested program to help low-income individuals afford flood insurance coupled with premium increases on other policyholders who currently do not pay full-risk premiums.

In the past year alone, Congress reauthorized the program by simple extension seven times instead of addressing its structural insolvency.

In terms of longer-term reauthorizations, two highlighted bills in the House and Senate reform the programs in diverging directions: HR 2874 and S. 1368 (the SAFE Act). Three competing objectives drive NFIP reform: improving solvency, aligning premiums better with the cost of risks, and keeping costs low enough to not drive consumers out of the market. HR 2874 passed the House last year and would implement several reforms, including increased premiums. The bill decreases direct spending by $12 million over ten years. S. 1368, sponsored by a bipartisan coalition of coastal members of Congress, more emphasizes affordability concerns and has not yet been scored.

A CBO report from last year also lays out broad options to address either program finances or affordability concerns. Options that would help NFIP’s finances including increasing premiums broadly, shortening the time period for which discounts apply, means-testing subsidies, or encouraging the use of high-deductible policies.

Interest Area     HR 2874 S. 1368
Premium subsidies     Increase insurance premiums Cap premium rate growth at 10% for all properties, including non-residences, and exclude catastrophic years from rate calculation
Borrowing from Treasury       Freeze interest debt accrual for six years
Affordability     Create a cross-subsidy for low-income single family homes Provide premium subsidy for low-income households
Role of private insurance     Allow more private insurance by loosening regulations and minimum standard requirements, require more use of reinsurance Limit margins to private sellers of NFIP policies
Multiple loss properties     Ramp up mitigation in repetitive loss communities, and increase premium rate growth for repetitive loss properties  
Increased cost of compliance     Raise cap on eligible expenses to elevate home or other mitigation from $30,000 to $60,000 Raise cap on eligible expenses to elevate home or other mitigation from $30,000 to $100,000, and exempt expense from maximum policy payout
Administrative reforms     Require flood disclosure at point of real estate sale after 2022 Require landlords to inform tenants if unit has flood insurance
Floodplain mapping     Create community appeals process for existing maps Appropriate funds to accelerate mapping updates, and create community appeals process for existing maps
Flood mitigation     Expand premium discounts for migration, and appropriate more to mitigation fund Expand premium discounts for migration, and appropriate more to mitigation fund

Source: Congressional Research Service.

Just last month Congress faced a July 31st deadline for reauthorization and opted to pass a short-term extension to prevent NFIP from being unable to issue flood insurance policies in the middle of hurricane season. The House and the Senate extended the current program another four months through November 30. Congress should be ready to put in place a longer-term reauthorization with reforms to address NFIP’s financial issues later this year. As part of our plan to pay for disaster relief spending needed at the end of 2017, we called for reforms to make the NFIP solvent.