Reauthorization of the National Flood Insurance Program

Depending on your location, you may be experiencing a trickle—or a torrent—of concern over the National Flood Insurance Program bill in Congress. But if at least one expert is right, there’s little need for worry. The program’s continuance, they say, is a virtual fait accompli.

The National Flood Insurance Program (NFIP) was established in 1968, primarily in response to the frequent flooding of the Mississippi River and the rising costs of taxpayer-funded disaster assistance, reports Jeanne McGlynn Delgado, vice president, business and risk management policy, with the National Multi Housing Council (NMHC).

Communities take part in the program, the primary source of flood damage insurance available, by agreeing to adopt and enforce management regulations to mitigate flood damage. In return, the federal government makes flood insurance available to those communities’ homeowners and businesses. It is a voluntary program, and 20,000 communities participate, Delgado says.

The NFIP expired in 2008 and has since been operating on a series of extensions. Efforts to reauthorize have been coupled with needed reforms to return the program to solvency. Broad consensus exists that reform is overdue, given the NFIP is $18 billion in debt, largely due to Hurricane Katrina.

Due to the limited private options available, homeowners and multifamily properties depend on the NFIP, Delgado reports. “When you have lapses in the program it creates a lot of uncertainty, and in some cases, disruptions, in transactions and property renewals,” she says.

Bill H.R. 1309 passed the House Financial Services Committee unanimously and is anticipated to go to the House floor for a vote in early July, Delgado says. “If, or when, the vote is scheduled, it is anticipated to receive broad support,” she adds. “And as far as the Senate goes, it has held a few hearings but has not yet introduced a bill. Within the current program set to expire Sept. 30, 2011, it is expected a bill will be dropped soon.”

The House bill’s key provisions, in addition to a long-term reauthorization, include increased limits for multifamily properties. “The proposal also offers optional business interruption coverage, which is important for property owners who, due to flood damage, can lose rental income until the property is repaired,” Delgado says.

Key among the bill’s provisions to address the debt include phasing in insurance rates to full actuarial rates, she adds. An estimated one-quarter of all policies now pay a subsidized rate, usually because these typically pre-1974 or pre-FIRM (Flood Insurance Rate Map) properties were built before the maps were created and floodplain management policies were in place.

“The House bill moves certain properties to the actuarial rate,” Delgado explains. “Apartment properties are not impacted, and we believe this is for good reason.

“Those properties represent the older stock and are therefore most likely serving a workforce market. [Higher] costs from increased rates would place stress on the ability to provide this kind of housing.”

In addition, the bill proposes a technical mapping advisory council, important because the program’s efficacy rests on accessing accurate maps. Floodplains change over time, in pace with ongoing development, which could affect whether a property is in a high-risk area.

According to Delgado, accurate maps are essential “to knowing whether you need flood coverage, or … whether the expectation you should have it is, in fact, incorrect.”

Supporters of the House bill include the real estate policyholder community, as well as the insurance industry, Delgado says.

“It’s expected there will be some debate as to whether to add wind coverage to the bill. That is a provision that has lacked broad support in previous Congresses.

“Given that our priority is to have a functioning program, we have not taken a position on the addition of wind, fearing that controversial provisions may further delay action on the underlying effort.”

Dan Freudenthal, president of West Palm Beach, Fla.-based Flood Zone Correction Inc., which evaluates flood risk and corrects erroneous high-risk designations, believes Congress will take the measures necessary to ensure the NFIP is sustained.

“It’s a very good program,” he says. “The problem with the NFIP bill as it is on the table is that legislators are inclined to pull needed provisions out of the bill that they see as hurting, or increasing costs to, their constituencies. The needed reforms get watered down.

“I don’t know if it will get a full five-year extension, but it’s not going away anytime soon, because there’s no alternative.”

Freudenthal agrees the House bill has considerable backing. Congress and the insurance industry both support the bill, he says. Congress backs it because it’s its own program, the insurance industry because claims will be paid by the federal government. Flood insurance premiums garnered are not hugely profitable for the insurance industry, but insurers do keep a portion of premiums they collect, Freudenthal says.

Still, more substantial changes must be implemented to the NFIP if it is to be a profitable program that best serves the owners of all classes of buildings, he says. “But they need to have the NFIP continue and not lapse as it has a few times in the last 24 months,” he adds.

The bottom line? Floods are the most common natural disaster the United States faces, and NFIP provides available and affordable coverage for flooding, Delgado says. “Our members rely on this program to not only protect their property investments, but help manage the growing costs of providing housing. For these reasons, we urge a long-term reauthorization of the program.”

To comment on this story, email Diana Mosher at [email protected].