Federal Flood Insurance Program is floundering, needs reform

Editor’s Note: The following excerpt is edited from a statement made by Sen. Richard Shelby, R-Ala., who chairs the U.S. Senate Committee of Banking, Housing and Urban Affairs. The committee is considering a Senate bill to reform the federal flood insurance program.

From its inception and until recently, the best thing the National Flood Insurance Program had going for it was a run of good luck. Even with such good fortune, however, the program could not avoid running in the red on some occasions. As the weather cycle changes and we move into a period of more powerful and frequent storms, it is important for Congress to confront the program’s deficiencies. We are not here to address a Katrina problem, a regional problem or even a new problem. We are here to address a national problem created by the operation of a poorly designed program.

Congress established the National Flood Insurance Program in 1968 to provide policyholders with some insurance for flood-related damage. Under the program, communities that chose to participate were required to undertake mitigation efforts to limit flood related damage as well as implement stringent building codes for all new development.

The goal of mitigation was to ensure that people were protected from flood related damage by requiring that they take steps to increase the durability of their homes. In addition, the program was supposed to generate enough funds through premium dollars to reduce taxpayer exposure to massive liabilities for disaster related assistance due to flooding.

To ease the transition into the program, all homes and businesses built prior to 1973 were given an explicit subsidy. The rationale behind such subsidies was the belief that owners of structures that had been mapped into the floodplain had not received adequate notice and therefore should not be forced into true risk-based rates immediately. At that time, it was assumed that many, if not all, of the homes subsidized would be destroyed and rebuilt within 10 years after the inception of the program. That has not proven to be the case.

Today, roughly 25 percent of the structures within the program still receive an explicit subsidy. The persistence of the subsidies is one of the greatest reasons why the flood insurance program is insolvent. The explicitly subsidized homes are the oldest structures within the program, and are the most likely to incur massive damage because they are not built to modern codes and standards. Furthermore, the subsidized structures receive a cross-subsidy from the structures paying the full standard rate.

Therefore, a modern home built to the most current building standards that is arguably the best prepared to handle flooding is actually paying extra to subsidize a neighboring structure that is the most likely to see catastrophic loss due to flooding. Beyond the explicit subsidies, the fiscal integrity of the program suffers because all of the properties in the program receive an implicit subsidy given that the Flood Insurance Rates Maps are considerably out of date and often highly inaccurate.

For example, it was determined after Katrina that the maps were off by as much as 15 feet in certain areas. That means the flood maps were off by as much as one and a half stories of an average home. Continued use of maps off by this large of a margin will not only allow further destruction, but far more importantly, will put people’s lives in danger.

The goal of this bill is to strengthen the program by eliminating subsidies on vacation homes, businesses and severe repetitive loss properties today, and to lay a foundation for the elimination of all subsidies in the future. Due to insufficiency in the existing maps, however, there is no way to eliminate all subsidies immediately. This bill, therefore, creates stringent standards that the NFIP must use to complete the map modernization process.

Once we have the most accurate and up to date flood mapping possible, we can transition to more accurate pricing. In addition to eliminating subsidies, this bill works to strengthen the program by requiring state chartered lending institutions to maintain flood insurance coverage for all mortgages located within the 100-year floodplain. It increases enforcement tools available to bank regulators, at both the federal and state levels by requiring escrow of flood insurance premiums throughout the life of the mortgage. It increases the civil monetary penalties regulators may levy against lenders for failure to comply.

Finally the bill creates a mandatory reserve fund to provide additional funding to help pay future claims without further need to seek contribution from the U.S. taxpayer. After months of committee scrutiny of the NFIP, severe internal leadership problems at the NFIP continue to plague this program. It has been two years since the 2004 Amendments to the Act went into effect, and still FEMA has failed and refused to implement all the provisions of that bill.

In addition, it has been extremely difficult to obtain accurate and useful program data from the NFIP. The more questions that were asked of the NFIP, the more this Committee recognized that the answers were not sufficient.

Therefore, this bill contains several studies that will help the committee determine the direction of this program in years to come. This program is up for re-authorization next Congress, and I intend to use the results of these studies to implement more long-term reforms to make this program far more financially viable.

The next 15 months will also be critical to determine if FEMA is up to the task of administering this program, or if this program should be reorganized into another federal agency. Since 1978, the flood insurance program has grown from 1.4 million policyholders and $50 billion in risk exposure to 5 million policyholders and almost $900 billion in risk exposure. Given its risks and costs, we can no longer ignore it. Reforming the flood insurance program presents the Committee with difficult choices. But doing nothing will result in catastrophic consequences: people will be exposed to harm, and the federal government will assuredly find itself bailing out the program and exposing the American taxpayer to never ending losses.

Topics Flood