A TOO-WELL-
KICKED CAN?
Congress still studies National
Flood Insurance Reauthorization
By Kevin P. Hennosy
Of course, I fear that when this column reaches the Rough Notes Galactic Headquarters in Carmel, Indiana, my immediate editor, Christopher W. “Captain” Cook, will exclaim: “Is Hennosy resubmitting old copy as new contributions?”
He knows me as a troublemaker.
Captain Cook does not like treachery in any form. He will try to root it out! My intrepid editor will thoroughly search back issues of this magazine using powerful database tools, which he will purchase from a military surplus website.
And what will Captain Cook find? One submission after another will populate the search results, all with the same title phrase: “National Flood Insurance Program Reauthorization.” Treachery!
Well, not really.
Oh Captain, my Captain, you are not the only one who finds this topic redundant. Just imagine how Bob Rusbuldt and Charles Symington at the Independent Insurance Agents & Brokers of America (IIABA) feel.
Since 2012, across three executive administrations, Congress reauthorized the NFIP for short terms 22 times. On September 30, 2022, President Biden signed the most recent short-term reauthorization, which will expire on December 16, 2022. As this issue of Rough Notes goes to press, it remains anyone’s guess as to whether Congress will pass a long-term reauthorization, another short-term reauthorization, or nothing at all.
Robust support
The NFIP is one of those legislative issues that attracts support for passage from multiple powerful interests. Yet, those interests support the legislation for distinct reasons, and sometimes conflicting ones—so, strength of support does not ensure quick passage.
Of course, IIABA works with each successive Congress and executive administration to preserve the role of insurance agents and brokers in the NFIP. The Big “I” supports long-term reauthorization of the public program as well as fostering private sector flood insurance coverage to augment the former.
Congress and the Johnson Administration created the NFIP in 1968, after more than 10 years of legislative effort. At that time, no private flood insurance market existed; however, in recent years private policies became available as insurers made use of improved computer-based risk models.
The Senate alone contains two clans of irreconcilables who will never support reauthorization—at least, until major-flooding menaces their state.
The National Association of Professional Insurance Agents (PIA) also supports and works for long-term reauthorization. In May, Ariel Rivera-Miranda, founder and agency principal of Deer Insurance Agency, in Jacksonville, Florida, and an officer of the PIA, testified before the Subcommittee on Housing, Community Development, and Insurance of the House Committee on Financial Services.
Rivera-Miranda reminded the subcommittee of the disruption caused when Congress allows the NFIP to expire even for a matter of days. “Prior lapses are estimated to have disrupted over 1,000 homes a day, and the longer the lapse, the greater the impact.”
Housing advocates support NFIP reauthorization to preserve and expand affordable housing. The housing advocates recognize that a flood plain designation for existing housing usually reduces rents and purchase prices, which in turn attracts low-income residents.
The residents of low-cost or subsidized housing prove particularly unable to absorb uninsured flood losses, which makes the NFIP vital to the recovery of low-income and/or physically infirmed residents.
The non-insurance aspects—such as flood mitigation or post disaster assistance—of the NFIP also prove important to housing advocates. Efforts to build physical barriers that reduce flood risk can expand available housing but can also reduce affordable housing through “gentrification” of formerly flood prone areas.
Bankers’ groups support the long-term reauthorization of NFIP. Banks face the risk of financial loss if structures designated as collateral on loans suffer flood damage. Although the banks face that risk of loss, bankers compel borrowers to retain and pay for flood insurance coverage. (It is good to be a banker.)
Changes to the program
At a Senate Banking Committee hearing conducted on June 23, 2022, Federal Emergency Management Agency (FEMA) Deputy Associate Administrator David Maurstad testified in support of a package of 17 legislative proposals that would reform the agency’s organization.
Maurstad stressed that long-term reauthorization and agency reorganization should advance to enaction together.
Maurstad’s testimony presented the legislative proposals grouped into four categories: 1) Affordability, 2) Flood risk management and communication, 3) Extreme repetitive loss properties, and 4) The NFIP financial framework. This testimony recognized the need to expand coverage to more Americans “by making insurance more affordable to low- and moderate-income policyholders.”
He did not propose simply writing a subsidy check. Instead, Maurstad described, “Reforms that address affordability, such as the use of a targeted assistance program, can offer low- and moderate-income current and prospective NFIP policyholders a graduated risk premium discount while providing them with knowledge of the full-risk price to communicate a property’s true flood risk.”
He explained the public policy goal of “communicating risk in real time and providing Americans with tools to manage flood risk.”
Consider this admittedly extreme example of not communicating flood risk to buyers or renters. A couple in the market for a house inquire about a dark line on the walls about three or four feet from the floor. The seller responds, “Please do not assume that is a high-water mark … it is art!”
Well, the situation does not need to be as blatant as the dramatic example described above, but withholding information about a structure’s flood history leads to the same end.
Maurstad’s testimony called for “Reforms that would require states to establish minimum flood-risk reporting requirements for sellers and lessors before residential transactions close … .”
The third category of proposed reforms to the NFIP presented by Maurstad concerns those properties that generate unmitigated losses after repeated flooding events.
The problem reminds this writer of a lecture he attended for an Intro-duction to Geology course at Ohio State where the professor opined: “In geology, there is a ‘rule of thumb’; flood plains are for floods.”
Of course, to comply with that rule of thumb, someone, usually a local or state official, must be the bad guy and tell a property owner not to rebuild in a flood-prone area. That sounds like a logical approach, but logic does not always prevail in small-town politics, where parochial pressures reign supreme. Local councils and state authorities too often approve rebuilding and restoration on doomed land.
Maurstad provided a statement to describe the scope of the problem: “Since 1978, nearly 100,000 structures have had two or more paid losses; nearly 1,000 have suffered 10 or more losses.”
At the congressional level, the most controversial proposal from FEMA for NFIP reform addresses “instituting a sound and transparent financial frame-work that allows the NFIP to balance affordability and fiscal soundness.”
“The NFIP currently carries $20.5 bil-lion in debt to the U.S. Treasury and pays approximately $400 million in interest expenses annually—this means we are using the current premiums to pay for past claims,” Maurstad warned. As interest rates rise, those numbers will look even more daunting.
FEMA proposes that Congress include in the long-term reauthorization statute a provision to forgive the NFIP debt to the U.S. Treasury.
That proposal draws opposition from a subset of the Senate Banking Committee members. The use of the word “forgive,” adds to the opponents’ ire. The opponents equate loan forgiveness, or relief from repayment, with “cease to feel resentment against a wrong-doer.” In this case, FEMA did no wrong.
If any institutions did wrong by saddling NFIP with $20.5 billion in debt to the Treasury, we should look at previous Congresses and Executive Administrations. Of course, Maurstad was too diplomatic to announce that observation.
Rather than passing and signing emergency appropriations measures for relief and rebuilding after Hurri-cane Katrina and other catastrophes, Congressional leaders and Senior White House Operatives “parked” the much-needed financial outlays on the NFIP’s books in the form of Treasury loans.
Congresses and White House administrations could have covered those catastrophe losses through extraordinary appropriation bills. However, appropriations bills tend to garner unwanted news coverage of “government spending.” Handling the spending through loans from the Treasury to NFIP barely received any attention.
Proponents of putting the NFIP on sound financial footing going forward need to find a euphemism to use other than loan forgiveness. A private sector Annual Report might describe the transaction as a “strategic reapportionment of assets between tactical-organization accounts.”
Lingering opposition
Will semantics quiet all the opposition to long-term reauthorization of NFIP? No way.
The Senate alone contains two clans of irreconcilables who will never support reauthorization—at least, until major-flooding menaces their state.
A flock of budget hawks will oppose the NFIP. This atavistic group of senators will ask why we need an NFIP now, when President Polk got along without one? They will allege that any insurance mechanism is just one step closer to “all power to the soviets.”
At the June 23rd Senate Hearing, Chairman Sherrod Brown (D-Ohio) mentioned another center of opposition: climate-change deniers. These senators resist granting approval to a long-term reauthorization that prepares for an increase in the frequency and intensity of flooding events—evidence of climate change.
With the consulting assistance of Milliman, FEMA instituted a new premium rating plan. The unofficial caucus of Senate climate-change deniers suspect that FEMA accepted loss projections influenced by expectations of more frequent and intense storms, which they do not want to endorse with their vote on reauthorization.
Can-kicking
So, my friends, and intrepid editors, we should assume that the topic of long-term reauthorization of the NFIP will revisit this column before anyone schedules a bill signing ceremony at the White House.
The “can-kicking phase” of this legislative process does not appear complete.
The author
Kevin P. Hennosy is an insurance writer who has written extensively on the history and politics of insurance regulation.
