A Mix of Flood Insurance Reforms

By | April 1, 2019

Conservation, CarFax-Like Disclosure, Means-Test for Rates Up for Discussion

The federal flood insurance program has a knack for inspiring ideas from reformers across the political spectrum on how to improve government.

If some of today’s reformers get their way, flood insurance will become a mandatory topic at real estate closings and a tool for protecting flood-prone lands from development. There will be a means-test for premium subsidies and an end to support for repeat flood properties.

Also, rates charged by the National Flood Insurance Program (NFIP) will more accurately reflect the unique flood risk of individual homes under changes being developed by the Federal Emergency Management Agency (FEMA).

There has for years been bipartisan support in the House of Representatives for a long-term extension and major reforms of the NFIP. But various bills championed by Rep. Jeb Hensarling, R-Texas, former chair of the House Committee on Financial Services, and passed by the House, have stalled in the Republican-controlled Senate.

Now under leadership of Rep. Maxine Waters (D-Calif), who replaced Hensarling as head of the committee after Democrats gained control of the House, lawmakers are trying again.

Bills now before the committee would, among other things, renew the NFIP until Sept. 30, 2024. The program is currently set to expire at the end of May under one of the 10 short-term extensions Congress has approved since 2017.

The current House proposals would also forgive the NFIP’s remaining $20 billion debt and boost funding for mapping, floodplain management, and mitigation for homes, businesses and infrastructure.

“Everyone is at risk of flooding,” said Waters, stressing that it is “not just a coastal issue.”

According to FEMA, floods are the nation’s most common and costly natural disaster, affecting all 50 states.

During a Capitol Hill hearing last month, advocates spoke on the bills and added a few of their own ideas — and criticisms — to the mix for lawmakers to consider.

Means-Testing

“The NFIP is a textbook example of unintended consequences,” said Raymond J. Lehmann, director of Finance, Insurance and Trade Policy for the think tank R Street Institute. “While the program has provided incentives for mitigation, these have not gone far enough, and the availability of cheap flood insurance has played a role encouraging people to build in flood-prone regions.”

Lehmann said the most significant new element is a proposed demonstration project for means-tested discounted rates.

“Addressing affordability has been a topic toward which members have paid quite a bit of lip service over the past 15 years, but this is the first substantial proposal to do exactly that,” he said.

The bill’s demonstration project would extend premium discounts to households making less than 80 percent of an area’s median household income, with discounted rates that would be capped at two percent of annual area median income.

While Lehmann praised the approach, he warned that while the 80 percent threshold may be appropriate in some communities, it may be necessary to add an upper income cap in wealthy areas where the median household income is higher than the national median. He suggested that discounted rates should be calculated as a percentage of the policyholder’s own household income.

A Government Accountability Office (GAO) report in 2012 found that 29 percent of subsidized policies were in counties in the top decile of median household income, and 65 percent were in counties among the top three deciles. In contrast, just four percent of subsidized policies were in the bottom decile and just 10 percent in the bottom three deciles. The program’s existing subsidies also flow from inland areas to coastal counties, he added.

Mortgage Disclosure

The mortgage disclosure idea came from Velma Smith who spoke on behalf of The Pew Charitable Trusts and called for a “national framework for flood risk disclosure to homebuyers and renters, not dissimilar to the existing requirement for lead paint disclosure for older homes.”

This would be upfront disclosures about flood risk that would be made available before financial commitments are made. She described it as a CarFax for homes.

“As many flood experts have noted, an understanding of flood risk is fundamental to preparedness and protection, but individuals frequently underestimate their own risk of flooding, the extent of the damage that flooding can cause, or both,” she told Congress.

She said some consumers may not realize that a homeowner’s policy does not cover flooding while others may assume that their chances of significant loss to a flood are remote or believe that federal disaster assistance will allow for full recovery and restoration.

“Many do not realize that for those living in the one-percent-annual-chance or 100-year floodplain, the chances of a flood occurring during the lifetime of a 30-year mortgage are roughly one in four, far greater than for fire,” she said.

Smith said sellers and lessors should be “compelled to share the information they know about past flood damages and claims, obligations to carry insurance based on previous access to federal disaster assistance, and designation of a home as repetitive loss property, which can have serious implications for flood insurance rates. They should also be compelled to share the results of any elevation survey completed on the property.”

Mapping

Among the many stressing the need for improved mapping of flood-prone areas was Maria Cox Lamm, South Carolina NFIP state coordinator chair, speaking for the Association of State Floodplain Managers, who told Congress that flood risk maps currently only exist for about one-third of the nation. That is, only 1.2 million of 3.5 million miles of streams, rivers, and coastlines have been mapped.

Not to mention that some of the current maps are many decades old or were updated before the current standards using more accurate data and topography. Also, there is still a large inventory of pure “paper” maps that have never been modernized, and many other areas have never been mapped at all. As a result, many communities have no maps or data to guide development to be safe from flooding.

“Floodplain mapping is the foundation of all flood risk reduction efforts, including design and location of transportation and other infrastructure essential to support businesses and the nation’s economy,” Lamm said, noting that flood maps are also used for emergency warning and evacuation, community planning, and locating critical facilities like hospitals and emergency shelters.

“FEMA must complete the initial flood mapping of the entire nation to get ahead of development,” she said.

She supported additional funding for mapping beyond the current $400 million a year.

She said a “stepped up commitment to mapping flood risk” is critical as the Trump Administration and Congress plan a major investment in building and repairing infrastructure.

“America’s trillion-dollar coastal property market and public infrastructure are threatened by the ongoing increase in the frequency, depth, and extent of tidal flooding due to sea level rise, with cascading impacts to the larger economy,” Lamm testified.

Inland, the situation is only slightly better, “but is still problematic,” she said.

Some communities have strong local floodplain management regulations that exceed federal minimum standards and can identify floodplains before development takes place. But most communities do not have such standards, meaning that development occurs with no flood standards. She described how this situation plays out locally:

“Well, this is what is happening in thousands of subdivisions across the country: areas that used to be cornfields and cow pastures are developing into tens of thousands of housing units. Later, after there is significant development at risk and often after a flood or two, FEMA comes in and maps it. Then the dynamic changes, and everything becomes adversarial. People think FEMA put a floodplain on them, when it was there all along. The property owner is mad because they have to buy flood insurance at high premiums because flood elevations were unknown. Realtors are upset because it is a surprise and may have an impact on the future salability of homes. And local elected officials fight to minimize the size of the mapped floodplain, spending thousands of dollars on competing flood studies.”

She said the nation needs to start changing its mapping priorities so this does not continue to happen. “The entire dynamic can change if maps showing risk are available before development starts,” she said. “We must map today’s corn fields and cow pastures to assure that quality flood mapping precedes development.”

Denial of Subsidies

R Street’s Lehmann asked lawmakers to consider an additional idea to lessen the likelihood of development in flood-prone areas, which he noted will only make matters more difficult in future years as people need to be relocated as a result of sea level rise and climate change.

“Over the next century, we may be forced to contemplate relocating potentially hundreds of thousands of Americans to higher ground should the Intergovernmental Panel on Climate Change’s projections prove accurate,” he said. “As a first step, it is critical that Congress reverse any federal policy that actively encourages Americans to move into harm’s way.”

Toward that end, the NFIP should cease writing coverage for any new construction in 100-year floodplains, he said.

He likened this approach to that of the Coastal Barrier Resources System (CBRS), which bars federal subsidies to development across a 3.5-million-acre zone of beaches, wetlands, barrier islands and estuaries along the Atlantic Ocean, Gulf of Mexico and the Great Lakes. This law, signed by President Ronald Reagan in 1982, does not actually prohibit development within the CBRS but it prohibits programs like federal disaster relief, highway funds and the NFIP itself from operating in these areas. As a result, Lehmann said, more than 80 percent of the CBRS zones remain undeveloped.

“Not only has the CBRS been successful in preserving fragile coastal habitats and ecosystems, but it has done so while actually saving taxpayer funds,” he said.

This model of promoting conservation by removing federal subsidies has been adopted successfully elsewhere, including by the U.S. Department of Agriculture with its “swampbuster” and “sodsaver” conservation compliance programs that limit subsidies that could serve as incentives to convert wetlands to agricultural use, according to Lehmann. Also, the state of Florida prohibits new construction seaward of the state’s Coastal Construction Control Line from receiving subsidized insurance from the state-run Citizens Property Insurance Corp.

Lehmann noted that barring new construction in 100-year floodplains from NFIP eligibility would not completely end development since developers might find private insurance. Nor would it relieve the challenges ahead with existing structures already in those zones. “It would, however, apply the ancient wisdom of the Hippocratic Oath: ‘first, do no harm.’ Where we can cease encouraging development of flood-prone land, without laying any new burden on any current resident, it is an opportunity we simply must take,” Lehmann said.

Repeat Flood

In terms of insurance rates, the Pew Trust endorsed changes to make coverage affordable while also rewarding mitigation, although it readily recognized achieving this is no easy task. Pew’s Smith offered a few guidelines. Any NFIP affordability program must be “carefully and tightly targeted” to policyholders that need it most. The program should also compensate clearly for the price signals new discounts convey. “Too many individuals assume that a low insurance rate equals low risk. Many will see a lowering of rates as confirmation of minimal risk. Where this is not the case, people should be fully informed and educated about their true risks. An affordability program should not feed flood complacency,” Smith testified.

The place for NFIP to begin needed “financial and mitigation triage” is with the long-standing but still growing problem of repetitive loss properties that have strained the program’s finances, according to Smith. In some years, these account for as little as one percent of the program’s policyholders but 25 to 30 percent of its claims. The NFIP provides for a more rapid escalation of rates for repetitive loss and severe repetitive loss properties compared with other premium-discounted properties. It also directs FEMA to prioritize mitigation assistance to such properties and requires more rapid rate escalation if an offer of mitigation assistance is refused.

“However, these are simply starting points to reducing the growth properties that flood over and over,” Smith said.

Rating Changes

For its part, separate from what lawmakers are doing, FEMA announced that the NFIP is modernizing its rating plan to more accurately reflect the actual flood risk of individual properties and

incorporate the use of up-to-date technology, data and industry best practices. NFIP aims to have the new rates for all single-family homes nationwide ready by Oct. 1, 2020.

“Our goal is to transform the NFIP through our insurance products and this new rating plan,” the agency said in a document announcing the change.

The new rating plan is being designed to go beyond whether a home is inside or outside of the 100-year floodplain, and instead incorporate private-sector data to calculate a more realistic flood threat for each home and set costs based on that data.

“Many people do not understand their flood risk, and as a result, don’t see the value of flood insurance. For example, more than 20 percent of NFIP flood claims are filed for properties located outside the high-risk flood area,” FEMA said.

The plan is likely to raise rates for many communities and homeowners with the greatest flood risk. Some worry it could also affect home values in those areas.

Private insurers applauded the move, claiming it will make the NFIP more like an actual insurance program.

“For far too long, the NFIP has kept rates artificially low, relying on taxpayer-funded bailouts while effectively encouraging building in flood-prone areas and, worse, leaving property owners vulnerable to flood risks they had no idea even existed,” said Jimi Grande, senior vice president at the National Association of Mutual Insurance Companies.

Other Matters

There was also support from insurance and real estate agents for requiring lenders to accept private flood policies as meeting federal purchasing requirements and for allowing consumers to move freely without penalty between the private insurance market and the NFIP as their needs and markets change.

In February, five federal agencies (the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the National Credit Union Administration) published a final rule outlining when federally related lending institutions must accept private flood insurance in satisfaction of the mandatory purchase requirement. The rule is currently scheduled to take effect on July 1, 2019.

Florida independent insurance agent Christopher Heidrick said agents hope this move it will provide clarity for homeowners and lenders. “But more work remains to be done due to some limitations within the statutory definition of private flood insurance,” he said, speaking on behalf of the Independent Insurance Agents and Brokers of America.

Agents are keeping their eyes out for any changes to the Write Your Own program and related payments to private carriers and agents for selling and servicing flood policies for the government.

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