Flood insurance in the United States could be transformed by recent legislation.After much debate, the House of Representatives voted 237 to 189 on November 14th to pass the 21st Century Flood Reform Act, renewing the National Flood Insurance Program (NFIP) just weeks before it was scheduled to expire. The measure, which now goes to the Senate for further consideration, extends the NFIP until 2022, proposes a number of reforms to strengthen the program’s financial standing, and revises premiums for flood insurance policies.
The vote wasn’t the House’s only recent action on the NFIP. In another effort to aid the debt-burdened NFIP, it passed a $36.5 billion disaster relief package last month that earmarks $16 billion to the program following Hurricanes Harvey, Irma, and Maria. Citing the Federal Emergency Management Agency (FEMA), which supervises the NFIP, a National Law Review article stated that the extra funds leave the program with $6 billion to pay claims and the capacity to borrow up to $10 billion from the Treasury.
Sponsored by Rep. Sean Duffy (R-WI), the 21st Century Flood Reform Act would limit annual premium increases to 5% to 15%, with homeowner premiums capped at $10,000 per year. Financial assistance would be provided to homeowners earning less than 150% of a state’s poverty level.
Under the act, flood zone maps would be updated. If a request to revise the flood map is denied, local governments and property owners could appeal the decision by submitting data proving that the map is inaccurate or that the risk of flooding is low.
To reduce the program’s debts, said to be around $25 billion, the act would mandate that the NFIP undergo a yearly actuarial review to certify whether it holds enough funds to cover projected long-term losses. FEMA would also be required to build a reserve fund in order to curb its borrowing from the Treasury.
Although the House bill would not impose a Trump-supported ban on new building in high-risk regions, it aims to lower the number of NFIP-insured properties that repeatedly flood. “If we’re going to make this program sustainable we cannot have 1% of the properties causing 25% of the losses,” House Financial Services Committee Chairman Jeb Hensarling (R-TX) said. “Ultimately, if all we do is rebuild the same properties in the same fashion in the same location, that is neither wise nor compassionate.”
If the Duffy act succeeds in increasing revenues for the NFIP while reducing the actual number of policyholders, the program’s direct spending will fall by $187 million between 2018 and 2027, the Congressional Budget Office estimates. Other measures outlined in the act include encouraging communities and property owners to undertake flood mitigation projects and buying out homes in flood-prone areas.
Private Market Participation
The House bill seeks to increase private market participation in the flood insurance marketplace by allowing private insurers now involved in the NFIP’s Write Your Own (WYO) policy program to sell their own private flood insurance contracts, a move that Rep. Duffy argues would lower rates, increase consumer choice, and lessen the burden on taxpayers. According to some in the industry, however, a proposed 3% cut in payments to WYO private insurers could have a negative impact on agents who sell flood insurance.
Under the WYO program, private insurers pay agent commissions from the funds they receive from the government for administering flood insurance policies. By reducing WYO reimbursements, fewer agencies might offer flood insurance policies, said Charles Symington, SVP of External, Industry and Government Affairs for Independent Insurance Agents & Brokers of America, Inc., also known as Big “I.” “Big ‘I’ agents are the primary sales force for flood insurance, and they play an integral role in helping consumers make informed decisions about the coverages they purchase for their properties,” he said. “The cuts proposed in this bill can lead to less consumer choice for homeowners who want to purchase flood coverage.”
According to the Property Casualty Insurers Association of America (PCI), since 2004, the number of WYO insurers has dropped from 107 to roughly 70. Jimi Grande, SVP of government affairs for the National Association of Mutual Insurance Companies, said any further reduction of the only 10% of U.S. insurance companies that act as WYO insurers “will likely mean even fewer choices for the same consumers who benefit from competition in the market.”
As Congress continues to discuss NFIP reforms, agents who sell flood insurance policies should monitor any developments that may impact their clients’ premiums. They should also bear in mind that new flood maps might mean that clients who previously weren’t required to buy flood insurance may need to do so.