The House Financial Services Committee has released portions of its draft legislation to reauthorize and reform the National Flood Insurance Program (NFIP), which is set to expire Sept. 30. The draft covers NFIP affordability, flood mapping, mitigation incentives, taxpayer protections, claims process and private flood insurance.
NFIP affordability
The draft legislation calls for reauthorizing the NFIP for five years and instituting new program reforms that will address consumer cost and affordability, provide more private market access, reform the flood mapping process, enhance mitigation efforts, strengthen taxpayer protections and implement reforms for claims processing.
To increase affordability, the draft legislation proposed to decrease the cap on annual rate increases from 18 percent to 15 percent; limit the chargeable risk premium of any single-family residential property to $10,000 per year, adjusted for inflation every five years; and increase the minimum average chargeable risk premium, within a single risk classification, from 5 percent to 8 percent.
The proposal would authorize states to voluntarily create a state flood insurance affordability program that identifies and validates eligible owner-occupants of single family 1-4 unit residences who are unable to pay their chargeable risk premium because of family income.
The states would forward their validated lists of all eligible policyholders for whom the states are seeking assistance, along with the recommended type of assistance for each policy, to FEMA.
Assistance would be in the form of either capping the amount of chargeable risk premium paid, or limiting the amount of premium increase on an annualized basis. FEMA then would calculate the value of the aggregate subsidy cost for eligible policyholders within the state, the cost of which would be recouped through an equally distributed surcharge on all other policyholders within that state.
The draft legislation calls for eliminating the NFIP’s mandatory purchase requirement for all commercial properties, while preserving the eligibility of commercial properties voluntarily to purchase NFIP coverage if they so choose.
The FEMA administrator would be required to develop a transparent public process to explain and engage with the public on its methodology to determine annual risk premium rates for NFIP coverage. The FEMA administrator also would be required to clearly communicate to all policyholders the full flood risks of their property, the number and dollar value of claims that have been filed over the life of a property, and the effect that filing any future claims would have on the cost of insurance for that property.
Private market
One goal of the legislation is to provide greater private market access, competition and consumer choice for flood insurance. The draft proposal would amend the Flood Disaster Protection Act of 1973 to clarify that flood insurance offered by a private carrier outside of the NFIP can satisfy that act’s mandatory purchase requirement.
The proposal would eliminate the regulatory restriction that currently prevents insurers participating in the NFIP’s Write Your Own (WYO) Program from selling both NFIP and private flood insurance policies, and require FEMA to develop an open-source data system to allow public access of all information related to assessing flood risk or identifying and establishing flood elevations and premiums.
This information would include data relating to risk on individual properties and loss ratio information and other information identifying losses under the program.
The proposal is calling for the comptroller general to conduct a study assessing the feasibility and effectiveness of establishing voluntary flood damage savings accounts to reduce flood insurance premiums and eliminate the need for purchase of flood insurance coverage. The FEMA administrator would be required to submit to Congress a plan for implementing a demonstration program to establish voluntary flood damage savings accounts that consider the analysis, conclusions and recommendations developed by the comptroller general.
Flood mapping
The proposal is calling for increased accuracy and fairness for flood mapping.
This would allow for localities to elect using their own resources to develop their own alternatives to NFIP flood maps, but also would require the FEMA administrator and the Technical Mapping Advisory Council to develop minimum standards for flood maps developed by communities for those areas, subject to certification and approval by FEMA.
Claims process
The proposal is calling for FEMA to find and fix fraudulent practices in the claims process, and to ensure that every policyholder gets the full benefit of the insurance coverage that they purchased.
The FEMA administrator would be authorized to develop penalties for false or fraudulent statements connected to claims. Such a penalty can include disbarment from participation in the NFIP.
The FEMA administrator would be required to make final determinations regarding the approval of a claim for payment or disapproval of the claim within 90 days of the claim being made. The FEMA administrator would be authorized to extend the 90-day deadline by an additional 15 days when extraordinary circumstances warrant more time.
Additionally, the proposed legislation calls for strengthening WYO company litigation oversight by providing the FEMA administrator the authority to oversee litigation conducted by WYO insurance companies acting on behalf of the NFIP. The proposal would require the FEMA administrator to ensure WYO litigation expenses are reasonable, appropriate and cost effective, and would give the FEMA administrator the authority to direct litigation strategy as necessary.
The FEMA administrator would be required to restrict the use of outside technical reports by WYO insurance companies. “Technical assistance report” would mean reports created for the purpose of furnishing technical assistance to an insurance claims adjuster assigned by NFIP, including those by engineers, surveyors, salvors, architects and certified public accounts.
Taxpayer protection
The FEMA administrator would be responsible for ensuring that the NFIP remains financial sound. The proposal would require the FEMA administrator to provide an annual independent actuarial study of the NFIP to analyze the financial position of the program based on its long-term estimated losses.
Using the text of the Luetkemeyer Taxpayer Exposure Mitigation Act (H.R. 2246), the proposal would require the FEMA administrator to use risk transfer tools, such as reinsurance, catastrophe bonds, collateralized reinsurance, resilience bonds and other insurance-linked securities, to reduce direct taxpayer exposure to insurance losses.
The Grimm-Waters Act affordability surcharge would be adjusted.
For instance, the proposal calls for restructuring the surcharge originally created by the Homeowner Flood Insurance Affordability Act of 2014 to:
- Increase annual surcharges from $25 to $40 for all primary residences;
- Reduce annual surchargefrom $250 to $125 for non-owner occupied residential properties that are subject to Preferred Risk Policy premium rates; and
- Increase the annual surcharge from $250 to $275 for all other non-primary residences.
The proposal aims to simplify FEMA’s designation and treatment of multiple loss properties by enhancing and consolidating the NFIP’s ability to manage and track properties with a history of multiple claims by defining a new “multiple-loss property” term to cover all at-risk properties.
Multiple-loss property would consist of three types of properties, including:
- A revised definition of repetitive-loss property, meaning a property with two more claims of any amount;
- A revised definition of severe repetitive loss property, meaning a property with four or more separate claims payments at $5,000 each and the cumulative amount of such claims payments exceeding $20,000, or at least two separate claims payments with the cumulative amount of such claims payments exceeding the value of the structure; and
- A new definition of “extreme repetitive-loss property,” meaning a property that has incurred flood damage for which at least two separate claims have been made with the cumulative amount of such claims payments exceeding 150 percent of the maximum coverage amount available for the structure.
As part of the continued availability of NFIP coverage, multiple-loss properties would be required to submit additional data required by the FEMA administrator to better ascertain the property’s specific risk, be subject to a minimum deductible of $5,000, and, for any multiple-loss properties not currently paying full risk rates, be subject to a subsidy phase-out at an annual rate of 15 percent per year.
Multiple-loss properties would also be eligible for prioritized mitigation assistance through the Flood Mitigation Assistance program, with up to a 100 percent cost share subject to the availability of funds. Owners of a designated extreme-repetitive loss property that refuse offers of mitigation following future losses would be ineligible to purchase future NFIP insurance until the property has been mitigated.
Mitigation
Lastly, the draft proposal calls for expanding mitigation efforts to focus on high-risk homes, especially pre-disaster.
Using the text of the Royce-Blumenauer Repeatedly Flooded Communities Preparation Act (H.R. 1558), the draft proposal would require covered flood prone areas to develop a community-specific plan for mitigating continuing flood risks if they have 50 or more repetitive loss structures or five or more severe or extreme repetitive loss structures.
Such communities must map and identify repeatedly flooded properties and infrastructure to determine the specific areas that should be priorities for voluntary buyouts, drainage improvements or other mitigation efforts; and develop a community plan to address those identified areas, along with submitting a plan to the FEMA administrator.
Communities that fail to develop or make sufficient progress in executing their plan would be subject to certain sanctions, as determined by FEMA.
The proposal would authorize the FEMA administrator to establish a pilot program to provide financial assistance for states and local communities to purchase and acquire properties located in participating communities from eligible low-income owners that have incurred substantial damage from a flood event.
The pilot program would limit FEMA to providing such assistance only when it determines that doing so would be cost-effective and in the best interests of the NFIP.
Additionally, the draft proposal would authorize the FEMA administrator to create a pilot NFIP program to authorize WYO insurance companies to inspect pre-existing structural conditions of insured and pre-insured properties that could result in a denial of a flood insurance claim.