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Flood Insurance Reforms Are Coming — Here's What You Need to Know

by Precise Leads

August 17, 2017

Hurricane season has begun, and so has debate in Washington over flood insurance reform.

Last month, Sens. Mike Crapo (R-ID) and Sherrod Brown (D-OH), both members of the Senate’s Committee on Banking, Housing and Urban Affairs, introduced a bill to reform and reauthorize the National Flood Insurance Program (NFIP). This bipartisan effort mirrors legislation released in May in the House of Representatives by Rep. Sean Duffy (R-WI), as well as another Senate package sponsored by Sens. Bill Cassidy (R-LA) and Kirsten Gillibrand (D-NY).

Lawmakers in both chambers have been scrambling to remake the NFIP before its September 30 expiration date. Further adding to the urgency for reform is the NFIP’s debt load of $25 billion, which it owes to the Treasury.

Although there are differences between the Senate and House versions, each bill essentially strengthens the NFIP through a mixture of increased private market participation in writing policies, increased use of risk transfer tools like catastrophic bonds, caps on premiums or vouchers for low-income homeowners, and funds directed to flood-prone communities for mitigation plans. The Crapo-Brown bill would also impose sanctions on communities that fail to undertake risk reduction efforts, although the Federal Emergency Management Agency (FEMA) has the power to grant exemptions based on a community’s resources.

Properties at Highest Risk

Much of the debate surrounding NFIP reform has centered on insuring homes ravaged by frequent flooding, which produce the most frequent and expensive claims. At the moment, filing two or more claims of more than $1,000 over a 10-year period places a structure in the “repetitive-loss property” group. In addition, FEMA puts “severe repetitive-loss” properties, or buildings with at least four claims of $5,000 each and two payouts equaling the value of the property, into a higher category.

11,000 severe repetitive-loss properties currently stand nationwide, according to the Patriot Ledger in Quincy, Massachusetts. Although these frequently waterlogged homes account for only 1% of NFIP claims, they account for nearly 30% of its losses, Laura Lightbody, Director of the flood-prepared communities’ initiative of the Pew Charitable Trusts, told Business Insurance.

A possible solution to those recurrent claims would be limiting construction in areas prone to damaging floods. The Duffy proposal, for example, would ban FEMA from providing flood insurance for new properties built in flood-ravaged areas after January 1, 2021, forcing owners to purchase costlier private insurance.

The government could also give homeowners a one-time buyout and raze homes in flooded areas. Rob Moore, Senior Policy Analyst, Water Program, for the National Resources Defense Council, recently suggested in a blog post that the NFIP strengthen its buyout initiatives for homes in areas prone to flooding. The NFIP, he asserted, “unintentionally trap(s) homeowners who would prefer to move somewhere safer. Instead of moving out of harm’s way, many policyholders find themselves rebuilding their homes again and again.”

Experts acknowledge, however, that halting construction in perilous but populated coastal regions may be hard to achieve. “Whether that would actually happen, I’m not sure. There’s a lot of pressure in a lot of communities to continue to develop in risky areas,” Carolyn Kousky, director for policy research and engagement at the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania, told Business Insurance.

Debate Coincides With Hurricane Season

The Senate has not announced a timetable for voting on the Crapo-Brown bill, which would extend the program for another six years. An article in The Hill noted the House reform package has yet to pass through the Financial Services Committee because of bipartisan opposition.

At this point, insurance agents must await the results of the legislative process. In particular, a provision in the Duffy legislation would affect properties owned by clients in areas previously marked outside of flood-prone areas. Since the Duffy bill calls for an update of flood zone maps, certain buildings may well be reclassified. However, the National Association of Realtors reported that a “grandfather” clause was inserted in that bill to protect properties from higher rates if maps are revised.

The debate over NFIP coincides with this year’s hurricane season, which should be a below-average El Nino-type storm year, according to scientists. That’s somewhat good news for property owners in states like Florida, where the Orlando Sentinel found 1,600 properties deluged by floods on an average of five times.

Even in a supposedly calm hurricane season, one major storm can create tremendous damage. Now is the time to review your client’s property insurance policies and confirm that they have enough coverage in the event of a hurricane.

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