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last updated on March 13, 2008

FLOOD INSURANCE

THE ISSUE IS…In 2005, flood claims arising from Katrina, Rita and Wilma exceeded $25 billion. The National Flood Insurance Program (NFIP) is roughly $18 billion dollars in debt, and must be reauthorized in 2008.

IT’S IMPORTANT BECAUSE…If Congress does not reform and reauthorize the program, the long term solvency of the program is at risk. The NFIP is set to expire September 2008.

Congress created the National Flood Insurance Program (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 must be created. The program was designed so that the premium dollars that are taken in every year (roughly two billion dollars) were used to pay out any flood losses that were incurred by policyholders. More than 90% of all flood policies are written through Write Your Own (WYO) carriers. The WYO Program allows participating property/casualty insurance companies to write and service the Standard Flood Insurance Policy in their own names. The companies receive an expense allowance for policies written and claims processed while the federal government retains responsibility for underwriting losses.

While the program was designed so that the premium dollars that are collected every year are used to pay out any flood losses that are incurred by policyholders, the year 2005 proved to be a very costly year for the program. The flood losses were so great in the first 10 months of 2005 that the total claims exceeded $20 billion. These claims are greater than all of the claims the NFIP has paid out from 1968-2004 combined. Due to the extraordinarily large number of claims, the NFIP quickly depleted its surplus. In fact, in November 2005, the acting head of the NFIP sent a letter to all of the WYO carriers informing them that they should stop paying all claims on flood policies until further notice.

NAMIC, working with its coalition partners, lobbied Congress to quickly pass legislation that would allow the NFIP to borrow money from the U.S. Treasury Department 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 has allowed the NFIP to pay claims through 2007.

In response to this situation, Congress has been working to pass a comprehensive flood reform package that would also reauthorize the program for an additional five years. House Financial Services Committee Chairman Barney Frank, D-Mass., introduced legislation that would raise the borrowing authority of the NFIP while also reforming the program. This bipartisan legislation was strongly supported by the insurance industry, and was almost identical to the legislation that passed the House of Representatives in 2006.

Among the key reforms included in the proposal that NAMIC supports are:

• Updates of flood maps and elevation standards to include mapping of the 500-year flood plain for future use.
• Phase-in of actuarial rates for non-residential properties and non-primary residences.
• Increased penalties on financial institutions that do not control customer compliance with mandatory coverage.
• Provide additional money for mitigation programs.
• Maximum coverage limits. Limits would be increased to $335,000 for structure, $670,000 for non-residential structure, and $135,000 for contents.

The legislation had enjoyed significant bipartisan support with almost no controversy until a highly-controversial proposal by Rep. Gene Taylor, D-Miss., to add wind coverage to the NFIP was included as part of the bill. The legislation (H.R. 3121) passed the House of Representatives in September 2007, by a vote of 263-146.

In October 2007, the Senate Banking Committee marked up a separate version of flood reform legislation, which NAMIC strongly supports. Similar to the House bill, the Senate reform measure contained many of the same significant reforms. In addition, the Senate bill (unlike the House bill) also included a provision that would forgive the more than $18 billion NFIP debt. By eliminating this debt, the Senate bill would allow the NFIP to be in a healthier financial situation.

Currently, the NFIP pays about $900 million a year to the Treasury in the form of interest payments. Without eliminating the debt, the future of the program is in serious jeopardy. The bipartisan Senate bill did not contain the wind provision that was included in the House bill. The Senate bill was quickly marked up and received almost unanimous support. Once the Senate bill passed the Committee, the Bush administration quickly endorsed the legislation, and threatened to veto the bill if the wind language becomes part of the legislation. However, several Senators have placed a hold on the bill, which has stalled the legislation in the Senate.

On a separate track, several groups are independently working on proposals that would allow insurance companies to offer an all-perils policy that would not be subject to rate controls. The proposals are still in the very early drafting stages and NAMIC will review each proposal carefully to ensure that it promotes a fair, private marketplace and does not include any federal regulation.

NAMIC POSITION…NAMIC strongly supports the Senate legislation and would support the House version if the Taylor wind proposal was deleted from the bill, and the NFIP debt was forgiven. NAMIC also supports a long-term five year reauthorization of the program.