WASHINGTON — Long-term flood insurance reform has eluded Congress for years. Lawmakers have had to pass short-term reauthorizations of the National Flood Insurance Program 16 times since 2017 just to keep the program operating.
Senators debated the program's future yet again Tuesday as the federally backed program faces another funding deadline at the end of September. But it remains to be seen if Republicans concerned about the program's cost can compromise with lawmakers in both parties from flood-prone areas.
“For the last decade and a half, NFIP has averaged an annual loss representing about half its total annual revenue,” said Sen. Pat Toomey, R-Pa., the ranking member of the Senate Banking Committee, in a hearing about the reauthorization of the program. “In the real world, a private insurer that had this magnitude of losses year after year would cease to exist.”
Although members of Congress on both sides of the aisle agree that the program — which provides flood insurance to more than five million property owners, renters and businesses — is fundamentally flawed, they may have to settle yet again for a short-term reauthorization rather than a comprehensive reform framework.
The federal flood insurance program allows mortgage lenders, real estate agents, homebuilders and the rest of the housing industry close deals on homes in floodplains.
Those looking to buy property in certain flood areas designated by the Federal Emergency Management Agency are required to purchase flood insurance in order to qualify for a mortgage. Private flood insurance is often pricey, and is often unavailable in certain locations especially prone to flooding.
But the program has operated at a deficit since Hurricane Katrina, and operates at a loss
The House Financial Services Committee
The Senate has been unable to reach an agreement on long-term changes. Tuesday’s hearing was the first in four years that the Senate Banking Committee has held on the NFIP.
Yet lawmakers appeared divided on where reforms to the program should be primarily focused. Senators from flood-prone states have long resisted certain reform efforts, citing concerns about premium costs for homeowners.
“The reality is, the more you put onto the back of the policyholder, the more people leave the program altogether,” said Sen. Bob Menendez, D-N.J. “Ultimately this idea is worse off for taxpayers, forcing Congress to spend more on expensive disaster relief that goes to unprotected homes.”
Meanwhile, others suggested that the federal government should instead be focused on increasing funding for infrastructure to mitigate flood risk.
“While we seek to halt the trajectory of our changing climate, we also need to help our families and communities become more resilient to the flooding we face now and in the coming decades, and whenever possible, avoid it altogether,” said Senate Banking Committee Chair Sherrod Brown, D-Ohio, who added that the committee plans to invite FEMA officials to testify at a later hearing on the NFIP.
Sen. Elizabeth Warren, D-Mass., also added that it would be challenging to make the NFIP more sustainable without first finding ways to better protect flood-prone properties.
“The NFIP is designed to help homeowners in at-risk areas rebuild after a flood, but that is really only part of the picture,” she said. “It's also a tool to prevent and mitigate the damage to our community before the flood hits, including making sure that we have the right infrastructure to protect property for rising water levels.”
Toomey, on the other hand, suggested that NFIP policyholders might be less inclined to take action to protect their properties from floods, given the backstop of the program.
“This is an intrinsic problem with many kinds of insurance products and flood insurance is no exception,” he said. “When homeowners and communities are protected from the financial loss of flooding, all else being equal, they have less of an incentive to manage and mitigate that risk.”
Stephen Ellis, president of Taxpayers for Common Sense and a witness at the committee’s hearing, agreed with Toomey.
“I think it's pretty clear that [the NFIP] has not had the right incentive structure to deal with moral hazard,” he said.
Other witnesses and lawmakers also raised concerns about FEMA’s new pricing methodology called Risk Rating 2.0 that it will use starting in October to assess flood risks for borrowers with NFIP policies.
FEMA has argued that the new framework will more equally distribute insurance costs among borrowers, but others have expressed alarm about the lack of information about the algorithms behind the methodology, as well as estimates that Risk Rating 2.0 will cause rates to increase for 3.8 million borrowers in the program.
Sen. John Kennedy, R-La., argued that FEMA’s changes to the NFIP pricing structure were going to make insurance more expensive for those who could least afford it.
“In five months time, without even a public notice and comment opportunity, you're going to ram through changes that potentially could make their home unaffordable and affect its value and make it impossible to sell,” he said, directing his comments at FEMA. “People don't understand Risk Rating 2.0 when FEMA has done virtually nothing to help them understand.”
New York City is “very, very concerned” about the impact Risk Rating 2.0 could have on policyholders, echoed Rebecca Kagan Sternhell, the director of the city’s Office of Federal Affairs.
“According to the report [FEMA] put out, it's only monthly increases [of] $10 or $20,” she said. “Well you know what, most people pay at once, and most people can't afford a $400 emergency. How are they going to afford another $250 in insurance premiums a year?”
Sen. Raphael Warnock, D-Ga., also questioned whether the new framework would have a disproportionate impact on communities of color.
“I'm concerned that this new pricing model will affect low-income communities in flood zones, those that have the least amount of resources,” he said. “This new pricing structure is intended to contain the federal costs of flood insurance. But do we risk unintentionally exacerbating racial and socioeconomic disparities that already exist?”
But others suggested that Congress should look at reforming the NFIP in a way that makes insurance more affordable instead of pressuring FEMA to do away with the Risk Rating 2.0 system. That framework ultimately serves to prevent borrowers with lower-cost homes from subsidizing those in higher-cost homes, said Velma Smith, senior officer of government relations at the Pew Charitable Trusts.
“I think we can then do an affordability program on top of that, that addresses both the rate and assistance for mitigation,” she said. “And I think if we allow FEMA to look at social vulnerability as one of the factors and giving grants, this will help solve the problem.”
