A Republican draft of legislation to reform the federal flood insurance program would renew the program for five years, phase out most rate subsidies, tie coverage limits to the rate of inflation, vary the deductible by how subsidized the premium is, and allow the program to sell optional additional living expense and business interruption coverages.
Insurance agents and a coalition of taxpayer and conservation groups have praised the draft as a good starting point for final reform, although they differed over whether adding two new coverage options is a good idea (see related story).
The proposal does not address the current $17 billion debt facing the National Flood Insurance Program (NFIP) largely as a result of the 2004 and 2005 hurricane seasons. But the proposal does attempt to put the program on sounder financial footing by insisting that current subsidized prices to most policyholders be raised so they eventually cover the actual cost of risk as determined by actuaries.
The draft bill was released by Rep. Judy Biggert, R-Ill., chair of the Insurance, Housing and Community Opportunity Subcommittee of the House Financial Services Committee. Her subcommittee began hearings on March 11, on flood insurance reforms.
The NFIP is currently scheduled to expire Sept. 30. This bill would extend the program for five years until Sept. 30, 2016.
The plan pushes the program to reduce subsidies in flood insurance rates in several ways. It requires that rates for most properties be raised by 20 percent a year until they reach actuarially sound levels. These include commercial properties, vacation homes, repetitive loss properties, homes that have had damage exceeding 50 percent of their value, homes that have had improvements exceeding 30 percent of their value, and homes sold to new owners.
However, some insureds would get a break. Rates for property owners in communities newly designated as flood hazard zones would be set at only 50 percent of the actuarial indications the first year. They could also be exempt from having to buy coverage if their communities object. After the initial year, their rates could be hiked by 20 percent each year until they are in line with what actuaries say they should be.
The bill would not mandate that rates for all other existing policyholders reach actuarial rates. But it allows NFIP to raise their rates within a flex-band of between 10 percent and 20 percent a year. Current law does not allow increases above 10 percent a year.
The bill does not add wind coverage to the NFIP offerings as some lawmakers from coastal states have urged in the past, but it does add two new coverage options: additional living expenses (ALE) up to $5,000 aggregate and business interruption (BI) coverage up to $20,000 per property.
Independent insurance agents have sought many of the reforms in the Republican draft, including the optional coverages, for years.
It also allows for coverage limits to automatically adjust according to inflation.
“We’re very encouraged,” said Charles Symington, senior vice president of government affairs for the Independent Insurance Agents and Brokers of America (the Big “I”), whose group had Connecticut agent Spencer Houldin testify at the Capitol Hill hearing. “It’s an excellent draft. It tackles many of the issues.”
The Big “I” was not alone in its praise of the Republican measure.
The bill was called a “very good start” by Eli Lehrer, the Heartland Institute, a free market think tank. Lehrer said the bill is “not perfect,” but it “has a lot of good aspects.” Lehrer said that while the bill does not directly address or forgive the massive NFIP debt, it does promise to put the program on sounder financial footing so that it may be able to pay off the debt eventually.
Lehrer’s group is a member of SmarterSafer.org, a coalition of taxpayer, conservation, business and free market economics groups that want to see changes in the flood insurance program.
Adam Kolton, National Wildlife Federation, and Steve Ellis, Taxpayers for Common Sense, both of the SmarterSafer.org coalition, joined Lehrer in a press briefing and agreed that the bill represents a good starting point for reform.
The Wildlife Federation is critical of the NFIP because its taxpayer-subsidized insurance helps promote development in wetlands and other environmentally-sensitive areas that destroys wildlife.
Ellis, of the taxpayers watchdog organization, said the timing is good because Congress appears willing to “take up problematic programs.” Congressional auditors have cited the NFIP as a high-risk government program for a number of years.
In other provisions, the Republican flood program draft bill would:
- Set a minimum deductible of $1,000 for policyholders whose premiums are at the cost of risk, while making $2,000 the minimum deductible available to those whose premiums are still below costs.
- Require that any property owners who let their policies lapse for lack of payment pay actuarially sound rates to restart coverage.
- Require more accurate flood maps and allow local residents and officials more input into mapping and eligibility decisions.
- Mandate two studies into privatizing the federal program. The Federal Emergency Management Agency and the Comptroller General would each be required.
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