Selected Issues for National Flood Insurance Program (NFIP) Reauthorization and Reform

Selected Issues for National Flood Insurance Program (NFIP) Reauthorization and Reform

Updated October 2, 2020
Selected Issues for National Flood Insurance Program (NFIP)
Reauthorization and Reform
NFIP Reauthorization
clearer understanding of their true flood risk, and a
The National Flood Insurance Program (NFIP) is the main
reformed rate structure could encourage more private
source of primary flood insurance coverage in the United
insurers to enter the market. However, charging risk-based
States, with more than five million policies in over 22,000
premiums may mean that insurance for some properties is
communities. Sixteen short-term NFIP reauthorizations
considered unaffordable. Under the current statute, rate
have been enacted since the end of FY2017, and the NFIP
increases for primary residences are restricted to 5%-18%
is currently authorized until September 30, 2021. Unless
per year. Other categories of pre-FIRM properties are
reauthorized or amended by Congress, the following will
required to have their premium increased by 25% per year
occur on September 30, 2021: (1) The authority to provide
until they reach full risk-based rates. FEMA does not
new flood insurance contracts will expire; however,
currently have the authority or funding to implement an
insurance contracts entered into before the expiration would
affordability program. An NFIP-funded affordability
continue until the end of their policy term (up to one year);
program would require either raising flood insurance rates
and (2) the authority for the NFIP to borrow funds from the
for NFIP policyholders or diverting resources from other
Treasury will be reduced from $30.425 billion to $1 billion.
existing uses of NFIP funds, such as flood mitigation
assistance or floodplain management.
The National Flood Insurance Program Reauthorization Act
of 2019 (H.R. 3167), a bill for the long-term reauthorization
H.R. 3167 would repeal a surcharge added by the
of the NFIP, has been reported (H.Rept. 116-262) by the
Homeowner Flood Insurance Affordability Act of 2014
House Financial Services Committee. H.R. 3167 would
(P.L. 113-89), which is $25 for primary residences and
reauthorize the NFIP until September 30, 2024, and allow
$250 for all other properties. H.R. 3167 would also create a
for a retroactive effective date in the event of a lapse. One
five-year affordability demonstration program to determine
bill has been introduced in the Senate, on July 18, 2019, to
the effectiveness of providing means-tested discounted rates
reauthorize the expiring provisions of the NFIP: the
for NFIP policies. The discounted premium rates would
National Flood Insurance Program Reauthorization and
only be available to owner-occupants of 1-4 unit residences
Reform Act of 2019 (S. 2187). A companion bill, H.R.
which are the primary residence of a household whose
3872, was introduced in the House on July 22, 2019. S.
income does not exceed 80% of the area median income
2187 and H.R. 3872 would also reauthorize the NFIP until
(AMI). The discount would cover the chargeable premium
September 30, 2024. H.R. 3872 would allow for continuous
rate in excess of 2% of the annual AMI for the area in
operation during any lapse in appropriations, by allowing
which the property is located.
amounts in the Reserve Fund to be used to enter into and
renew contracts for flood insurance. Thus, all of these bills
S. 2187 would prohibit FEMA from increasing the amount
make provision to reduce the impact of a government
which policyholders are required to pay in NFIP premiums,
shutdown on the NFIP.
fees, and surcharges by more than 9% per year during the
five-year period beginning on the date of enactment. S.
Premiums and Affordability
2187 would also require FEMA to establish an
The statute directs that NFIP flood insurance rates should
Affordability Assistance Fund. This fund would be credited
reflect the true flood risk to the property. However,
with the amounts saved as a direct result of restricting the
Congress has directed FEMA to subsidize flood insurance
reimbursement of Write-Your-Own (WYO) companies (the
for certain categories of properties. Currently, properties
private insurance companies who are paid to write and
that pay less than the full risk-based rate are determined by
service NFIP policies) to no more than 22.46% of the
the date when the structure was built relative to the date of
aggregate amount of premiums charged by the company.
adoption of the Flood Insurance Rate Map (FIRM),
Financial assistance from the Affordability Assistance Fund
regardless of other possible reasons, such as the flood risk
would be used for vouchers, grants, or premium credits to a
or the ability of the policyholder to pay. Congress has
household, if (1) housing costs exceed 30% of the
directed FEMA to subsidize flood insurance for properties
household’s adjusted gross income for the year and the total
built before the community’s first FIRM (the pre-FIRM
assets owned by the household are not greater than 22% of
subsidy). FEMA also grandfathers properties at their rate
the median income of the state in which the household is
from past FIRMs to updated FIRMs through a cross-
located; or (2) the total household income is less than 120%
subsidy. Under existing law, pre-FIRM subsidies are being
of the AMI and the amount of the premiums, surcharges,
phased out, while grandfathering is retained indefinitely.
and fees for an annual flood insurance policy exceeds 1% of
the coverage limit of that policy.
Reforming the premium structure to reflect full risk-based
rates could place the NFIP on a more financially sustainable
path, risk-based price signals could give policyholders a
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Selected Issues for National Flood Insurance Program (NFIP) Reauthorization and Reform
Properties with Multiple Losses
or extending the time required to repay previously incurred
An area of controversy involves NFIP coverage of
debt.
properties that have suffered multiple flood losses. One
concern is the cost to the program; another is whether the
The role of the NFIP has historically been broader than just
NFIP should continue to insure properties that are likely to
providing insurance. As currently authorized, the NFIP also
have further losses. According to FEMA, all repetitive loss
encompasses social goals to provide flood insurance in
(RL) and severe repetitive loss (SRL) properties amount
flood-prone areas to those who otherwise would not be able
to approximately $17 billion in claims over the history of
to obtain it, and to reduce government’s cost after floods.
the program, or approximately 30% of total claims paid.
The NFIP has tried to reduce the impact of floods through
Some RL and SRL properties have been mitigated, and
flood mapping and mitigation efforts. The majority of
some are no longer insured by the NFIP. Reducing the
funding for floodplain mapping and management comes
number of RL and SRL properties, through mitigation or
from the Federal Policy Fee (FPF), which is paid by all
relocation, could reduce claims and improve the NFIP’s
NFIP policyholders. To the extent that the private flood
financial position. H.R. 3167 would introduce a new
insurance market grows and policies move from the NFIP
definition of RL property, which would be broader than the
to private insurers, FEMA would no longer collect the FPF
current definition. H.R. 3167 would also define a new
on those policies and less money will be available for
category of extreme repetitive loss properties: structures
floodplain mapping and management.
which have incurred flood damage for which at least two
separate claims have been made with the cumulative
H.R. 3167 would direct FEMA to consider private flood
amount of such claims payments exceeding 150% of the
insurance that satisfies the mandatory purchase requirement
maximum coverage available for the structure. H.R. 3167
as also satisfying the continuous coverage requirement to
would also allow FEMA to consider the extent to which a
keep NFIP premium subsidies in place. The mandatory
community is working to remedy such repetitive loss
purchase requirement mandates that federally-regulated
communities when allocating mitigation assistance.
lending institutions require property owners in a Special
Flood Hazard Area to purchase flood insurance as a
Private Flood Insurance
condition of obtaining a mortgage. H.R. 3167 would also
Private insurers play a major role in administering the
allow FEMA to provide current and historical property-
NFIP, including selling and servicing policies and adjusting
specific information on NFIP coverage, flood damage
claims through the Write-Your-Own program, but the NFIP
assessments, and payment of claims to private insurers.
retains the direct financial risk of paying claims for these
This information would be provided on the condition that
policies. Few private insurers compete with the NFIP in the
private insurers provide the same information to FEMA,
primary residential flood insurance market. However,
homeowners, and home buyers. S. 2187 would establish
private insurer interest in providing flood coverage has
that the total amount of reimbursement paid to WYO
increased in recent years, and private insurance is seen by
companies could not be greater than 22.46% of the
some as a way of transferring flood risk from the federal
aggregate amount of premiums charged by the company. S.
government to the private sector.
2187 would also require FEMA to develop a fee schedule
based on recovering the actual costs of providing FIRMs
Private flood insurance may offer some advantages over the
and charge any private entity an appropriate fee for use of
NFIP, including more flexible policies, broader coverage,
such maps. This requirement could provide a mechanism by
integrated coverage with homeowners’ insurance, business
which private insurance companies could contribute to the
interruption insurance, or lower-cost coverage. Private
costs of floodplain mapping.
marketing might also increase the overall amount of flood
coverage purchased. More people purchasing flood
CRS Products About the NFIP
insurance, either NFIP or private, could help to reduce the
CRS Report R44593, Introduction to the National Flood
amount of disaster assistance provided by the federal
Insurance Program (NFIP).
government. Increasing private insurance, however, may
have some disadvantages compared to the NFIP.
CRS Report R46095, The National Flood Insurance
Program: Selected Issues and Legislation in the 116th
Unlike the NFIP, private coverage availability would not be
Congress.
guaranteed to all floodplain residents, and consumer
protections could vary in different states, leading to variable
CRS Report R45242, Private Flood Insurance and the
claims outcomes. In addition, private sector competition
National Flood Insurance Program.
might increase the financial exposure and volatility of the
CRS Insight IN10784, National Flood Insurance Program
NFIP, as private markets may seek out policies that offer
Borrowing Authority.
the greatest likelihood of profit. In the most extreme case,
the private market might “cherry-pick” the profitable,
CRS Insight IN10835, What Happens If the National Flood
lower-risk NFIP policies that are “overpriced” either due to
Insurance Program (NFIP) Lapses?
cross-subsidization or imprecise rate structures. This could
leave the NFIP with a higher density of actuarially unsound
CRS In Focus IF10988, A Brief Introduction to the National
policies that are directly subsidized or benefit from cross-
Flood Insurance Program.
subsidization. An increase in private flood insurance
policies that “depopulates” the NFIP may also undermine
Diane P. Horn, Analyst in Flood Insurance and Emergency
the NFIP’s ability to generate revenue, reducing the ability
Management
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Selected Issues for National Flood Insurance Program (NFIP) Reauthorization and Reform

IF11023

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https://crsreports.congress.gov | IF11023 · VERSION 6 · UPDATED