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FLOOD INSURANCE

THE ISSUE IS...In 2005, flood claims arising from Katrina, Rita and Wilma exceeded $25 billion. In order to pay all of these claims, Congress must pass legislation that allows the National Flood Insurance Program (NFIP) to borrow money from the Treasury.

IT’S IMPORTANT BECAUSE...If Congress does not grant the NFIP additional borrowing authority, the NFIP would be unable to pay the thousands of flood insurance claims that it is contractually obligated to pay.

Congress created the NFIP in 1968 to address the increasing costs of taxpayer-funded disaster relief for flood victims and the increasing amount of damage caused by floods. With private insurers unable to underwrite the risk of massive floods, it became clear that some form of federal program needed to be created. The program is designed so that the premium dollars that are taken in every year, roughly $2 billion, are used to pay out any flood losses that are incurred by policyholders. The program was also designed to utilize the already existing distribution system that exists in the private market. Therefore, while all premiums collected, and all claims that are paid out go directly in and out of federal accounts, more than 90 percent of all flood policies are written through Write Your Own Carriers (WYOs). These WYOs act as a middle man that are paid a commission for doing much of the administration of the program. When a claim is made, the WYO will process the claim and make payment with government reimbursement.

While the program was designed so that the premium dollars that are taken in every year are used to pay out any flood losses that are incurred by policyholders, 2005 proved to be too costly for the program. The flood losses were so great in the first 10 months of 2005 that the estimated claims are expected to exceed $25 billion. These claims are greater than all claims the NFIP has paid out from 1968-2004 combined. Due to the extraordinarily large number of claims, the NFIP quickly ran through all of its funds. In fact, on Nov. 14, 2005, the acting head of the NFIP sent a letter to all WYOs informing them that they should stop paying all claims on flood policies until further notice.

In response to this crisis, NAMIC, working with its coalition partners, lobbied Congress to quickly pass legislation that would allow the NFIP to borrow money from the Treasury to pay its obligations. In order to keep the program afloat, Congress passed several small increases in borrowing authority. In March 2006, both the House and Senate passed another increase in borrowing authority. This time, the borrowing authority was raised to $20.8 billion, a level that will allow the NFIP to pay claims well into September 2007.

As the 109th Congress was nearing an end, the House passed a flood reform bill that included an increase in borrowing authority to $25 billion, which would allow the NFIP to pay all of its claims arising from the 2005 storms. In addition to the increased borrowing authority, the flood reform included the following reforms:

  • Reduction of waiting period for effective date of policies. The length before a flood policy kicks in will now be reduced to 15 days from the current 30 days.
  • Maximum coverage limits. Limits would be increased to $335,000 for structure, $670,000 for non-residential structure, and $135,000 for contents.
  • Coverage for additional living expenses, basement improvements, business interruption, and replacement cost of contents. There would be an additional charge for those policyholders who would like to have business interruption covered.
  • Increase in annual limitation on premium increases. The annual increase for premiums can be raised by 15 percent, up from the current 10 percent cap.
  • Updating of flood maps and elevation standards. Of note, this would include mapping of the 500-year flood plain that could be used in the future.
  • To conduct a study regarding states of pre-firm properties and a mandatory purchase requirement for natural 100-year flood plain and non-federally related loans.
  • Phase-in of actuarial rates for non-residential properties and non-primary residences. All second homes will gradually pay actuarial rates, which will be increased at a level of 15 percent per year until they reach actuarial soundness.

Last May, the Senate Banking Committee also passed a flood reform bill that allows the NFIP to borrow the necessary funds to pay all remaining claims. In addition to including many of the same reforms that were in the House bill, the Senate added several other key reform provisions. The Senate bill will set actuarial rates on all second homes, commercial properties, and repetitive flood-loss properties. It will also increase the mandatory coverage areas by including residual risk areas located behind man-made structures such as levees and dams. Residual risk areas are areas that would otherwise be within the 100-year flood plain but are currently not required to obtain flood insurance because they are protected by man-made structures such as levees and dams.

Finally, the Senate bill increases penalties on lenders who do not enforce mandatory participation. During the drafting of the Senate bill there was strong consideration to reduce the rate at which WYO companies are reimbursed. However, NAMIC and its coalition partners were successful in explaining that participation in the NFIP is not a very profitable business for WYO carries as currently written, and if the rate was reduced, many WYO carries would probably lose money on the program and likely choose to drop out. In the end, the rate reduction was substituted with a study to look into the structure of the WYO program.

While both bills had widespread support in both chambers, the Senate was unable to bring its legislation up for a vote due to a hold by two senators from the gulf region who had reservations about some of the reforms in the legislation.

NAMIC POSITION...While NAMIC agrees that there needs to be additional reform to the NFIP, we do not believe that these reforms should stand in the way of Congress passing the additional borrowing authority that the NFIP has requested. NAMIC believes that we must take care of those homeowners who did the right thing by purchasing flood insurance, and we must do so immediately.

Posted: Thursday, February 15, 2007 12:00:00 AM. Modified: Thursday, February 15, 2007 1:39:56 PM.

317.875.5250 - Indianapolis  |  202.628.1558 - Washington, D.C.

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