Expanding a federal program that is already $17 billion in debt might seem like a non-starter of an idea on budget-sensitive Capitol Hill these days.
However the idea is included in a Republican-drafted reform of the National Flood Insurance Program (NFIP) and the proposal is backed by powerful insurance, real estate and homebuilder lobbies, while being opposed by taxpayer and conservation groups.
Rep. Judy Biggert, R-Ill., chair of the Insurance, Housing and Community Opportunity Subcommittee of the House Financial Services Committee, held a hearing last week on her draft of a bill to reauthorize and reshape the NFIP.
Her bill would extend the flood insurance program for five years until Sept. 30, 2016. The NFIP, which insures 5.6 million policyholders, is currently scheduled to expire Sept. 30.
Biggert’s overall proposal got generally positive reviews from insurance and business groups, as well as Democrats on the committee. Most parties appear to like that it extends the program for five years, reduces subsidies by bringing premiums more in line with actual costs, and improves the accuracy of the flood zone maps that determine which property owners must buy flood insurance.
“There is no question that the program is in dire need of reform. For many years, the NFIP has been — for lack of a better phrase — under water,” Biggert said.
“We must work toward a long-term plan for flood insurance that eliminates taxpayer risk. In the near-term, important reforms to the NFIP must improve its financial stability, reduce the burden on taxpayers, and examine ways to increase private market participation.”
Biggert’s proposal contains a provision instructing the NFIP to add two new insurance products to its portfolio: additional living expenses (ALE) coverage of up to $5,000 for homeowners and business interruption (BI) coverage worth $20,000 for commercial property owners.
The tacking on of these optional coverages is one of the more controversial features of Biggert’s overall proposal, along with the fact that her proposal does not directly address the NFIP’s $17 billion debt.
The NFIP was not always in debt; its premiums used to cover all losses and expenses. But that was before 2004 and 2005, a span when eight major hurricanes hit the U.S., causing flood losses to soar. Claims for these two years exceeded the total amount paid during the previous 37-year existence of the NFIP program — and that was before claims from the Midwest floods of 2008 added to the burden.
NFIP’s pricing did not then anticipate – and still does not factor in — such catastrophic losses. NFIP borrowed money from the U.S. Treasury to help pay the unprecedented claims. That’s how it got saddled with its $17 billion debt.
Agent and other insurance industry advocates maintain that the extra coverages would not exacerbate the debt situation. Instead, they argue that the new features will bring in more customers and help the program shore up its finances. Only about 20 to 30 percent of property owners who should obtain flood coverage actually buy it.
“The program must take steps to increase these numbers dramatically in order to properly pool the flood risk and achieve financial soundness,” Sandra Parrillo, chairman of the National Association of Mutual Insurance Companies (NAMIC), told the committee.
Proponents maintain that the coverage expansion would not contribute to financial woes because the NFIP would be required to charge cost-based actuarial rates for the new coverages and the agency would not be able to borrow from Treasury to cover the exposure. Also, the NFIP could only offer the extra coverages when there is no private market available.
Business interruption insurance provides protection against the loss of profits and continuing fixed expenses due to an interruption in operations. Independent agents who deal directly with those who suffer flood losses say the coverage is important.
“If a flooding catastrophe causes a business’ premises to be temporarily unusable, that business may have to relocate or even close down temporarily. Property owners are still required to pay employees, mortgages, leases and other debts during this process, and these ongoing expenses can mount up quickly for a business on reduced income or no income at all,” Connecticut independent agent Spencer Houldin told committee members.
Houldin, representing the Independent Insurance Agents and Brokers of America, or the Big “I”, on Capitol Hill, said the coverage would help more than the individual business owners.
“The inclusion of an optional business interruption provision will provide stability to the local economies in the areas affected by flood damage and will offset government disaster relief payments should the flood peril result in widespread destruction across a region,” Houldin said.
Additional living expenses coverage helps pay for hotel, food and replacement clothes when someone has to relocate due to a flood. The arguments for letting NFIP offer the ALE coverage for homeowners are similar to those for adding BI. Insurers also note that the ALE option would bring NFIP in line with what is available to homeowners under private flood policies and state windstorm plans.
“This provision will provide consumers with greater security during the often bewildering post-flood period, and will do so on an actuarial basis as opposed to relying solely on FEMA grants and assistance,” said IIABA’s Houldin.
“[T]he creation of a more expansive ‘deluxe’ flood insurance option, or a menu of insurance options from which policyholders could pick and choose, could provide additional homeowner benefits while aiding program solvency,” Barry Rutenberg, a home builder from Gainesville, Florida representing the National Association of Home Builders (NAHB), told Biggert’s committee.
Others, including realtors, also support the new coverage options, arguing that having more policyholders covered for these losses could help reduce federal spending in communities declared disaster areas after flooding.
“Increasing participation would lead to increased funds for the NFIP, help property owners recover from flood losses and decrease future federal assistance when under-insured properties flood and suffer loss,” said Terry Sullivan, a real estate broker from Spokane, Washington, and board member with the National Association of REALTORS.
However, the idea of letting the NFIP offer two additional coverages when it hasn’t been able to pay for the basic coverage it now offers makes no sense to the watchdog group, Taxpayers for Common Sense.
“While the draft legislation directs the Administrator to not provide the coverage if a competitive private insurance market for it is available, we have learned from federal flood insurance itself that the best way to stifle a private market is to have the federal government provide the same product,” said Steve Ellis, Taxpayers for Common Sense, which is part of a larger alliance of conservation, taxpayer and business groups, SmarterSafer.
The group also opposes the provision in the draft bill that would enable the coverage limits to annually increase according to inflation. It says this “would result in taxpayers being on the hook for potentially higher and higher loss levels and stifle the development of a secondary insurance market.”
The government’s own watchdog agency, the Government Accountability Office (GAO), which has for years placed NFIP on its list of high-risk agencies because of its debt, management and structural challenges, has also questioned the wisdom of adding the BI coverage to NFIP’s portfolio.
In a 2009 report, the GAO found business interruption coverage for flood losses is generally available in the private market only for businesses that have a policy that includes flood coverage. It also found that the coverage is expensive and is typically purchased only by large companies.
While adding business interruption insurance to NFIP could help small businesses obtain coverage that they could not obtain in the private market, the GAO says NFIP currently lacks resources and expertise in this coverage in which the underwriting, pricing and claims adjusting are complex.
“[A]dding business interruption insurance could be difficult, adding to NFIP’s existing debt and potentially to its ongoing management and financial challenges,” the GAO concluded.
The Federal Emergency Management Agency (FEMA), which administers the flood insurance program, has embarked on its own review of NFIP and is readying a report with recommendations that should be ready this summer. But Biggert indicated she will not wait for FEMA’s report and prefers to move ahead with legislation as soon as possible.