It’s High Time We Move the National Flood Insurance Program to Higher Ground
Tuesday, June 16, 2015
AHA Policy Analysis
For the 5.5 million homeowners and businesses in over 21,000 communities throughout America protected by the National Flood Insurance Program (NFIP)1, the topic of affordable flood coverage sponsored by the US government is something they probably know a good deal about. For the rest of the America’s homeowners and the taxpayer at large, the subject is something we should all pay much closer attention to. Recent efforts to extend or ‘reauthorize’ the NFIP have resulted in a series of unforeseen and dire consequences. Perhaps most troubling of all has been the virtual explosion of NFIP premium costs to levels that are downright back-breaking. In an effort to make an ailing but necessary program stronger, we’ve inadvertently made it worse. Thankfully, the US Congress has taken bipartisan steps in the right direction to address this urgent situation. The AHA stands with legislators in both houses of Congress and both sides of the political aisle in supporting the speedy passage of the Homeowner Flood Insurance Affordability Act into law, while also demanding additional deliberate steps to provide reasonably affordable national flood insurance that will stand the test of time.
The National Flood Insurance Program was created though legislation included in the National Flood Insurance Act of 1968. The reason was simple. The cost of sharing the risk of a catastrophic flood among premium-paying homeowners in flood-prone communities is less than the cost of emergency cleanup without such coverage. Unfortunately, flood coverage is the sort of public good the private sector historically shies away from given the size of the task and the lack of profitability, thus creating the need for a federal program. It is estimated that more than 5.5 million homeowners and businesses purchase flood coverage through the NFIP today.
Here’s how it works. NFIP Communities agree with the federal government to adopt and enforce various floodplain management ordinances in areas designated as carrying a high risk of potential flooding. The federal government then provides subsidized NFIP coverage to homes and businesses in the designated area at a premium price established by various federal agencies. Real estate purchases and construction cannot take place in these communities without a flood insurance policy in place. NFIP was designed to pay for itself through homeowner premiums. However, the NFIP has the ability to borrow funds from the United States Treasury when circumstances demand as much.
The program has certainly had its share of detractors through the years. The majority of arguments against NFIP fall in the realm of the ‘moral hazard’ of inviting flood plain construction through the presence of a taxpayer-backed insurance program to offset any heightened personal risk on the part of the homeowner. Add to the equation the arithmetic of a program that has increasingly come to rely upon loans from the US Treasury, and the need for program reform is rather clear.
In 2012, the U.S. Congress made a bipartisan attempt to place the NFIP on more stable footing with the passage of the Biggert Waters Flood Insurance Act. The act extended the authorization for NFIP for 5 years and made reforms to NFIP that include eliminating existing subsidies for
In addition to other reform-minded measures, this bill also allowed for a 25% annual increase on NFIP premiums on non-primary residences. It even phased out subsidies on coverage to Severe Repetitive3 Flood Loss properties4 – the 1% of all flood policies that account for roughly 30% of NFIP damage awards paid in a given year. Original Congressional Budget Office estimates suggested post-Biggert Waters premiums of ‘hundreds, perhaps thousands’ of dollars. (No. You’re not reading an author’s typo). Instances of flood insurance premiums of $20,000 on homes of extremely ordinary value have been documented.
The Biggert-Waters law has entrusted implementation of its policy changes to the Federal Emergency Management Agency (FEMA). To be fair, FEMA has a rather tall task on its hands. Like many such efforts for reform, the devil resides within the details. Data constraints make it difficult for FEMA to estimate the overall cost of subsidies and establish rates reflecting actual flood risks on previously subsidized policies. Notification of premium increases for impacted homeowners and federal rules for administering premium hikes commonly referred to by policymakers as ‘guidance’ is to be handled by FEMA staff. This common transfer of implementation duties from the legislature to the executive branch of government has been met with a somewhat familiar degree of confusion. Biggert-Waters also calls for a yet-to-be completed study on the affordability of increased NFIP premiums. One does not have to possess a great amount of policy know-how to suspect that this report will find overall NFIP affordability to remain an ever-present challenge.
Of course, for those homeowners not directly impacted by a need for flood insurance, this begs the question, ‘why not move to another community – one without the ever-present risk of flood?’ A fair question, to be sure. The most complete answer is that an individual move does not change the fact the America’s residential housing market needs affordable and adequate flood insurance to function properly.
Literally millions of Americans live in communities potentially impacted by floods – many in places we would hardly suspect. These homes cannot be sold without a flood insurance policy in place. Flood insurance offered at truly staggering prices is ultimately charged to the buyer as an added cost. As a result, those properties requiring flood insurance are either deeply discounted, or simply will not sell because of the added cost. Property values in these communities will falter, and comparable prices in other unaffected communities will artificially rise given increased local demand. Should a community choose not to participate in the NFIP, its individual homeowners cannot purchase insurance through the NFIP, even if there are areas of the community deemed to be in a flood plain. These homeowners are ineligible for a loan sold to Fannie or Freddie, which most likely means that no financial institution will lend to them. There will be winners and losers ranging from buyers, to sellers, to lenders, to schools, to employers and municipalities, and many more.
Finally, there is the unavoidable possibility of a flood event. Families lose their homes. Communities lose their taxable base. America picks up the exorbitant cost of an emergency recovery - whether we live in a potentially impacted community or not. The simple truth is America’s housing marketplace cannot continue to function as it should without the presence of a healthy National Flood Insurance Program.
- any residential property which is not a primary residence
- any property that has incurred flood-related damage in which the cumulative amounts of payments under this title equaled or exceeded the fair market value of the same property;
- any business property
- any property that has experienced or sustained substantial damage exceeding 50 percent of the fair market value or substantial improvement exceeding 30 percent of the fair market value.
America’s Homeowner Alliance supports the Homeowner Flood Insurance Affordability Act. This bill represents a crucial step on the road to a sustainable National Flood Insurance Program, one that provides adequate protection at a reasonable cost, thus protecting the homeowner, the community, the residential housing marketplace as a whole, and the American taxpayer alike. Flood insurance that threatens to bankrupt the homeowner it is intended to protect, is potentially as harmful as a flood event itself. After all, a flood event is a matter of chance and probability. The slow-motion act of a poorly designed risk-sharing pool falling in on itself one bad deal at a time could be a matter of eventual certainty.
The implementation of the Biggert Waters Flood Insurance Act of 2012 must be postponed in favor of a report on the potential impact of NFIP premium increases that is as thoughtful as it is realistic. Clear implementation guidelines must be established for those Biggert Waters measures that are deemed both sound and beneficial to the sustainable solvency of the NFIP. Additionally, steps must be taken to make the NFIP solvent over the long haul. An insurance pool populated only by those unable to sidestep risk, and propped up by unbearable costs the insured can’t afford to pay, isn’t a real flood insurance program at all. The solutions certainly aren’t easy, but a sustainable solution we must find. The Homeowner Flood Insurance Affordability Act is a step in the right direction.
It’s high time America move the National Flood Insurance Program to higher ground through meaningful reform based on stable program design and real premium projections.
1 Holladay JS, Schwartz JA. (2010) ‘Flooding the Market: The Distributional Consequences of the NFIP’. Institute for Policy Integrity. NFIP statistics as of April 2010.
2 As of May 2013, FEMA owed the US Treasury $24 billion—up from $17.8 billion prior to Superstorm Sandy—and had not repaid any principal on its loans since 2010. “Flood Insurance: More Information Needed on Subsidized Properties,” Report #GAO-13-607, July 3, 2013, p.2.
3 FEMA defines ‘Severe Repetitive’ as single-family properties incurring at least four NFIP claim payments exceeding $5,000 each, with a cumulative amount of more than $20,000; or at least two separate claims have been made with the cumulative amount of the claims exceeding the value of the property. 4 The Biggert-Waters Flood Insurance Reform Act of 2012 immediately eliminated subsidies for about 438,000 National Flood Insurance Program (NFIP) policies. With the continuing implementation of the act, subsidies on approximately 715,000 remaining policies are slated for future elimination. Ibid, p.12.