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Senate Banking Committee Strengthens National Flood Insurance Program

WASHINGTON (May 25, 2006)—The National Association of Mutual Insurance Companies (NAMIC) commends Senate Banking Chairman Richard Shelby, R-Ala., and Ranking Member Paul Sarbanes, D-Md., for seeking swift action to reform the National Flood Insurance Program (NFIP).

The Senate version of the Flood Insurance Reform and Modernization Act of 2006 (FIRM) would require, among other things, stricter compliance with mandatory insurance coverage and increased participation in the program.

In a May 23 letter to Chairman Shelby, NAMIC and other insurance industry trade groups expressed their strong support for reforming the NFIP, acknowledging that the devastation from Hurricanes Katrina, Rita and Wilma exposed weaknesses in the NFIP and the need for reforms to put it on a more stable financial footing. “NAMIC greatly appreciates Chairman Shelby’s leadership in crafting legislation to accomplish this goal,” said NAMIC Senior Vice President for Federal Affairs David A. Winston. “In particular, Chairman Shelby’s legislation establishes the framework for a federal flood insurance program that will be able to continue to serve policyholders in need of flood insurance while protecting American taxpayers.”

The legislation aims to strengthen the program – funded by premiums and administered by insurance companies – which has an estimated $23 billion debt from claims arising from hurricanes Katrina and Rita.

Included in the legislation are some provisions which NAMIC believes are essential to reforming the program:

Section 4. Reform of Premium Rate Structure

  • Subsection (a) will gradually phase out the current subsidies on several pre-FIRM properties as follows
    • Non-primary residences;
    • Any severe repetitive loss property;
    • Any business property;
    • Any property that has incurred damage in amounts exceeding its current Fair Market Value;
    • Any property which has sustained substantial damage exceeding 50 percent or substantial improvement exceeding 30 percent of its current Fair Market Value.

"NAMIC agrees with Chairman Shelby that repetitive loss properties and second homes should pay actuarial rates. There is no reason for American taxpayers to subsidize these properties time and time again," said Winston.

Section 5. Mandatory Coverage Areas

  • Requires the director of this program to issue an amended final regulation of special flood hazard areas to include areas known as residual risk areas located behind manmade 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 manmade structures such as levees and dams.

"Following the devastation that was caused in New Orleans due to the failure of the dike system, it is clear that even those living behind man-made protections would benefit from purchasing flood insurance,” said Winston.

Section 7. State Chartered financial institutions

  • This section requires that by December 31, 2008, all state chartered financial institutions be subject to the same requirements of federal depository institutions to maintain mandatory flood insurance on all mortgages within the mandatory coverage areas of the program.

Section 8. Enforcement

  • Section 8 increases the civil money penalties from “$350” per violation to “$2,000” per violation against lenders who fail to ensure that individuals who must participate within this program maintain flood insurance on their mortgage. This section also eliminates the $100,000 annual cap on fines that can be levied against lenders.

Section 9. Escrow of flood insurance payments

  • Section 9 requires that flood insurance payments be placed into an escrow account on behalf of the borrower.

"One of the shortcomings of the current NFIP program is the extremely low take-up rate. NAMIC believes that the provisions in Chairman Shelby's bill that strengthen enforcement, require escrow of flood insurance payments, and make state-chartered financial institutions enforce mandatory coverage on covered mortgages, will be a big step toward increasing participation in the program," said Winston.

Section 10. Financing of Funds from the Treasury

  • This section authorizes the Secretary of Treasury to provide funds to cover existing obligations of the NFIP for the 2005 hurricane season.

"NAMIC commends Chairman Shelby for raising the borrowing authority to fully fund the NFIP. We believe that the number one priority of the NFIP is to ensure that those responsible individuals who purchased flood insurance will be duly compensated. By raising the borrowing authority, Chairman Shelby has enabled the NFIP to immediately pay all existing claims that are still pending," explained Winston.

Section 12. Minimum Deductible levels for claims

  • This sets minimum annual deductible for pre-FIRM structures at $2,000, and post-FIRM structures at $1,000. All deductibles are at an annual basis, and once the deductible has been met, no further deductible is required.

“As we are just days from entering a new hurricane season, NAMIC will continue to work with Congress to make certain that any reforms that are put in place will help strengthen the program, not weaken it,” said Winston.

The House version, H.R. 4973, passed the House Financial Services Committee in March.

For further information, contact
Georgiann Howell
(202) 628-1558 Tel
(202) 628-1601 Fax

Justin Roth
(202) 628-1558 Tel
(202) 628-1601 Fax

Posted: Thursday, May 25, 2006 12:00:00 AM. Modified: Friday, May 26, 2006 10:38:19 AM.

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

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