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2017 Reauthorization and Future Viability of the National Flood Insurance Program

Shawn Homand - Chief Underwriting Officer - Global Property, Ironshore

Congress created the National Flood Insurance Program in 1968 in response to the rising cost of taxpayer funded disaster relief for flood victims, and also to address the increasing amount of damage caused by flooding. The aim of the program was to reduce the impact of flooding by providing affordable insurance to property owners and by encouraging communities to adopt and enforce flood plan management regulations.

The NFIP was set up to be self-funded, but has the ability to borrow from the U.S. Treasury during periods of higher than normal flood insurance claims. At this time, the NFIP owes the U.S. Treasury $23 billion. There are several reasons for this deficit.

— Premiums are not actuarially sound and do not reflect the inherent flood risk.

          - About 20% of the in-force policies are “Pre-FIRM” properties that were built before FEMA mapped the flood risk in that particular community. The rates on these properties were discounted to encourage participation by both communities and property owners. Pre-FIRM policies have experienced 5 times more flood damage than new properties built in compliance with NFIP flood maps and non-discounted rates.

          - The NFIP’s current risk pricing does not contemplate a catastrophe scenario, thereby leaving the NFIP vulnerable to material revenue to loss ratio imbalances in any catastrophic loss year.

— Non-compliance with mandatory purchase programs also contributes to flawed pricing assumptions as a smaller premium pool must support a larger risk base.

— Prior to Biggert-Waters Flood Insurance Reform Act (2012), the NFIP was prohibited from establishing loss reserves or purchasing reinsurance.

The Biggert-Waters Flood Insurance Reform Act of 2012 extended the NFIP for five years, while also making significant changes to the program to assure viability. Two key components of Biggert-Waters are: 1) the requirement that FEMA cease giving premium discounts to properties that are below the base flood elevation, even if they were up to code when built, and 2) that Pre-FIRM and grandfathered rates be phased out.

Political pressure from those affected by the Biggert-Waters changes brought about the Homeowner Flood Insurance Affordability Act, which was signed by President Obama in March of 2014. The law repeals and modifies certain provisions of Biggert-Waters. The law lowers the rate increases that would have been implemented on some policies, prevents future rate increases on certain policies and implements a surcharge on all policyholders. The Act also repealed certain rate increases that had already gone into effect and provided for refunds to those policyholders.

The rollback of the Biggert-Waters rate increases shows the political difficulties around achieving sound rates for NFIP. There is a large group of constituents who are impacted by the rate increases, and policymakers will continue to feel intense pressures from them. There is no defined group that benefits from the rate increases, other than the general taxpayers, and this would come from a relatively small reduction in federal budget expenditures. However, if rates are not brought into line to match risk, NFIP will be unable to serve its intended purpose without continued taxpayer funded bailouts.

As we get closer to the September 30, 2017 NFIP renewal date, congressional leadership will have to address the financial viability of the NFIP program.  If rates are not brought in line with risk, the program will continue to be a subsidy paid by the taxpayers to homeowners in critical flood areas. 

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