Harvey’s Devastation Brings New Attention to Troubled Flood Insurance Program

It’s been six months since President Trump’s "skinny budget" proposed cutting $190 million from the flood-hazard mapmaking line item in the National Flood Insurance Program. Now, with Hurricane Harvey inundating thousands of homes in Texas, lawmakers who had shared the White House view may be reconsidering whether, as the Trump team wrote, the government should restructure the program’s homeowner user fees “to ensure that the cost of government services is not subsidized by taxpayers who do not directly benefit from those programs.”

The flood insurance program, which was created in 1968 and is run by the Federal Emergency Management Agency, administers some 5.1 million policies totaling $1.25 trillion in coverage across 22,000 communities.

But the program has also amassed a debt to the Treasury of $24 billion. Its flood maps are considered out of date, and it has been on the Government Accountability Office’s high-risk list since 2006 because of financial issues and operational inefficiencies.

“Since the program offers rates that do not fully reflect the risk of flooding, NFIP’s overall rate-setting structure was not designed to be actuarially sound in the aggregate, nor was it intended to generate sufficient funds to fully cover all losses,” GAO reported in February.

Despite updated legislation in 2012 and 2014, the flood insurance program—which faces a reauthorization deadline of Sept. 30—has been the subject this year of several congressional hearings and legislative reform efforts.

Texas Republicans, such as Sens. John Cornyn and Ted Cruz, and House Financial Services Committee Chairman Jeb Hensarling, have been leery in the past about disaster relief spending. in 2012, all three voted against boosting emergency aid for victims of Hurricane Sandy without offsetting spending cuts.

In January of this year, Hensarling said, “the National Flood Insurance Program is poorly designed, costly and in desperate need of fundamental reform.” Under the program, he said, “a single mom working hard to put food on the table for her kids is forced to pay for insurance for some millionaire’s beachfront vacation home.”

Hensarling’s  office did not respond by publication time Monday with a comment on whether Harvey’s impact had changed his views.

A group of state insurance commissioners backs the flood insurance program. "The NFIP plays a critical role in providing coverage and any delay or lapse in the program will hurt consumers," said Mike Consedine, CEO of the National Association of Insurance Commissioners, in July.

Meanwhile, the balance in FEMA’s cash relief fund stood at $3.8 billion as of July 31, with most of that set to be spent by the end of September, Fortune has reported. The House has proposed adding $6.8 billion to the fund in fiscal 2018, a figure that may rise in Harvey’s wake.

Last month, the House Appropriations Committee rejected Trump’s proposal to kill the NFIP’s mapping budget, instead earmarking $190 million for flood plain management and mapping and $13 million for associated salaries and expenses.

“The stability of the real estate and mortgage markets depend on an on-time, multi-year reauthorization” of the flood insurance program, Roy Wright, deputy associate administrator of insurance and mitigation at FEMA, told the Senate Banking, Housing and Urban Development Committee in March. “All federally backed mortgage lenders are required to verify that properties in special flood hazard areas have flood insurance policies prior to approving a mortgage. During periods in the past when the NFIP’s authorization lapsed, or was only extended for a short period, uncertainty about flood insurance availability impacted property owners’ ability to buy and sell homes in high-risk flooding areas.”

Wright endorsed the effort to encourage a larger private-sector flood insurance market.

In the House, Hensarling’s committee this summer approved several flood-program-related bills:

• H.R. 2868, introduced by Rep. Lee Zeldin, R-N.Y., aims to protect NFIP policyholders from unreasonable premiums and requires FEMA to conduct a study to analyze the unique characteristics of flood insurance coverage of urban properties.
• H.R. 2874, by Rep. Sean Duffy, R-Wis., would, among other provisions, “enhance the development of more accurate estimates of flood risk through new technology and better maps.”
• H.R. 2875, by Rep. Nydia M. Velázquez, D-N.Y., is designed to reduce fraud and ensure policyholders’ claims are paid out.

Some Democrats have criticized the overall Republican approach. “Flood insurance premiums and fees would still increase for all policyholders, coverage would still be less available, and cherry-picking by the private sector would be encouraged, putting the government on the hook for the riskiest of policies,” said Maxine Waters, D-Calif., ranking member of the Financial Services panel.

In the Senate, Banking Chairman Mike Crapo, R-Idaho, joined with Sen. Sherrod Brown, D-Ohio, in July to introduce a basic reauthorization bill (S. 1571) to extend the program for six years. It was soon countered by another bipartisan bill from Democrat Robert Menendez of New Jersey and Republicans John Kennedy of Louisiana, Marco Rubio of Florida and Thad Cochran of Mississippi. The chairman’s bill “does nothing to address the affordability crisis facing families as premiums continue to rise at triple the rate of inflation,” Menendez said. “It does nothing to fix the structural flaws that plagued the claims process and led to tens of thousands of families being lowballed. And it doesn't invest nearly enough in mitigation efforts or to better understand risk through more accurate, scientific mapping.”

Yet another bill, which has drawn the backing of the insurance commissioners association, is the Flood Insurance Market Parity and Modernization Act (H.R. 1422, S. 563) introduced in the House by Dennis Ross, R-Fla., and in the Senate by Dean Heller, R-Nev. It seeks to reassure lenders and consumers of the validity of privately issued flood insurance.

"State insurance regulators support this legislation because it provides consumers with more options for coverage, which could lead to more affordable prices," said Ted Nickel, NAIC president and Wisconsin insurance commissioner.