In Congressional testimony July 19, the Independent Insurance Agents of America (IIAA) advocated a series of reforms for the National Flood Insurance Program (NFIP) that would help reverse operating losses and make the federal program actuarially sound.
J. Fletcher Willey Jr., a member of IIAA’s Government Affairs Committee and chairman of its Flood Insurance Task Force, testified at an NFIP hearing in the Financial Services Committee’s Housing and Community Opportunity Subcommittee. The hearing was called by subcommittee chairwoman Rep. Marge Roukema (R-N.J.).
Willey testified that while IIAA supports the NFIP, it recognizes that there is need for reform to make the program actuarially sound. He added that the IIAA hopes to work with the subcommittee to meet the fiscal goals of the program with the least amount of disruption to people’s lives as possible.
In his remarks to the panel, Willey offered five reform principles “that IIAA believes must animate NFIP reform efforts to both improve the program and avoid any unintended negative effects.”
Strengthen NFIP Building Regulations
Construction standards help communities better manage floodplains two ways. First, they allow communities to require new construction in floodplains to include safeguards against flood damage (i.e. placing buildings on pilings). Second, the regulations require existing structures that are substantially improved to also incorporate flood safeguards.
1. Increase Compliance with the Mandatory-Purchase Requirement-The NFIP would receive additional premiums and improve its financial condition if there were a better rate of compliance with the mandatory flood insurance purchase requirement. The Federal Emergency Management Agency (FEMA) has found that fewer than 20 percent of buildings in areas covered by the mandatory-purchase requirement are actually covered by flood insurance. Sanctions for enforcement of the mandatory purchase requirement need to be improved so that the NFIP can collect additional premium to help balance its books, and fund the payment of future losses with a reduced likelihood of having to borrow from the federal treasury.
2. NFIP Should Have Additional Resources for Mitigation-The NFIP should take action to prevent future losses through the purchase of the homes and businesses of property owners in the most flood-prone areas so that those individuals can move out of the floodplain or provide grants to owners of existing properties so that they can make improvements (such as raising their structures) that decrease the risk of flood loss. These preventative measures will decrease the number of repeat claims and save the NFIP money. As long as the program is sensitive to the potential dangers, buy-outs can be beneficial tools to improve the financial standing of the NFIP. Former FEMA Director James Lee Witt has estimated that there will be a $2 return on every $1 spent on buy-outs of repetitive loss properties. This impressive return on investment can be achieved by putting more money into the NFIP for buy-outs
3. Stop Abuse of the Program Through Multiple Claims-Congress must do more to stop NFIP abuse. Some individuals have bought in flood zones in order to take advantage of repeat payments from the NFIP. While the people in this category are a small minority of property owners, they are an expensive minority. There must be some mechanism to either remove these individuals from the program or make them pay the full, unsubsidized premium based on sound actuarial standards. Congress also must recognize that not all repeat claimants are abusing the system. The majority of these people are victims of natural disasters and bought their homes or businesses without any desire to make a claim for flood damage.
4. Require Mandatory Disclosures of Flood Information-One of the best ways to avoid future problems with the NFIP is to give people information about flood risks. Many people originally bought their properties without knowledge of the flood risk. Reform should include mandatory disclosures of the flood history of the property so that buyers can make an informed choice in their purchases and they can properly value the home. To make mandatory disclosure effective, Congress should create an accessible electronic database of flood losses.
Willey noted that the NFIP has about three and one-half million policies in force with over $370 billion in coverage. He added that most of those policies are sold by the more than 110,000 insurance agents participating in NFIP’s ‘Write Your Own’ program.
Willey added that the system operates well and does not need revision and that the IIAA wants the program to continue in the hope that it will get stronger.
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