House Bill to Reform Flood Insurance Also Comes Up Short

This blog post is based on H.R. 3370, as proposed on February 21, 2014. We will continue to update this blog post as new versions of the legislation become publicly available.

As we have detailed in previous blog posts, the National Flood Insurance Program (NFIP), which insures approximately 5.5 million residential and business structures and their contents against flood damage, is in serious financial trouble. It is approximately $24 billion in debt to the U.S. Treasury and the program’s ongoing large, unfunded subsidies to policyholders mean that losses are likely to continue in the future. The House of Representatives is currently considering a measure that would undo some recent rate increases. Despite measures that sound promising, the House bill would not do enough to move NFIP toward fiscal soundness.

In July 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters), which removed or phased out large subsidies for certain policyholders and discontinued the process of “grandfathering,” whereby properties that are remapped into higher-risk areas can maintain lower rates. Many of the resultant rate increases have already taken effect while others are due to begin later this year. These increases – which, in many cases, were quite steep – prompted a quick response from those affected. The outcry resulted in Congress including a provision in January’s omnibus appropriations legislation that denies implementation funding for some of the scheduled Biggert-Waters rate increases.

Earlier this month, the Senate passed a bill undoing more of them, and the pending House bill shares many similarities with it. In particular, both would fully reverse dramatic rate increases that took effect on October 1, 2013, for properties that were not insured when Biggert-Waters was signed or that were purchased after Biggert-Waters passed.¹ Both versions also reinstate grandfathering.

Unlike the Senate bill, the House version includes a measure that mandates rate increases for almost all of the currently subsidized properties. Unfortunately, the specified increases are too slow to make a real difference to the program. Given the rates specified in the legislation, premiums would take nearly 25 years to reach their unsubsidized levels.²

Another section of the bill institutes a premium surcharge to help fill the reserve fund that Biggert-Waters opened to fend off catastrophic losses. The annual charge would be $25 on most policies and $250 on non-residential properties and non-primary homes. While larger rate increases on the latter group of policies may be politically easier, the expected losses on subsidized primary residences are still the biggest single threat to the program’s long-term financial health and an ongoing burden to the American taxpayer. The combination of a small across-the-board surcharge on primary residences and a higher one on other types of properties does little to incentivize people to stop living in areas that are at particularly high risk of flooding. Furthermore, these surcharges are ultimately insufficient to make the program fiscally stable in the long run.

Aside from these adjustments to premiums, the House bill contains strong provisions that move the program toward private reinsurance and community-based policies, both of which were suggestions in our earlier blog. Specifically, the bill gives NFIP the authority to use privately issued reinsurance and mandates a study of offering optional community-based policies.

The bill also allows for high-deductible plans (which would presumably have lower annual premiums than the options currently available), clarifies when mitigation efforts can be relevant to premium calculations, and adds specificity about the requirements for the affordability study that was mandated by Biggert-Waters. While many of these are positive steps, they are unlikely to have a significant impact on the finances of NFIP.

Unfortunately, the House bill, like the Senate version, does not do enough to place the program on a sustainable financial path. Minimum premium increases on subsidized properties are a good idea but a higher level is necessary. We suggested increases of 25 percent for homes that are sold and a slightly lower level (perhaps 15 percent) for homes retained by the owners with means-tested protections to ensure affordability for low-income policyholders. The Bipartisan Policy Center encourages Congress to continue working to restore financial sustainability to NFIP while simultaneously being mindful to treat fairly those who own homes in flood zones.

Alex Gold contributed to this post.

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¹ The House version actually repeals the rate increases while the Senate bill simply delays rate increases until after the program will have to be authorized in 2017. The The House bill also stipulates that policyholders be paid back for overage payments on their premiums

² The statute mandates that rates grow such that the average increase in a particular risk class is between 5 and 15 percent of the rates currently being paid. For this back-of-the-envelope calculation, we assumed that rates would be increased at 5 percent each year and that 2 percent annual inflation would erode the value of those increases.