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Flood insurance pits homeowners against taxpayers

Failure to write in real risk keeps unstable program going

flood door

Flood insurance reforms enacted in the Biggert-Waters Flood Insurance Reform Act of 2012 remain at risk of being rolled back by popularity-conscious lawmakers as insurance premiums increase for property owners with homes in disaster-prone areas.

Enacted reforms targeting the National Flood Insurance Program trickled into the market back in October, the Bipartisan Policy Center said in its latest push for ongoing reform.

A few months later, homeowners battling higher premiums were already pressuring lawmakers to carve back new premium hikes, creating just one more battle over flood insurance.

From the standpoint of the BPC and the Government Accountability Office, reforms to the National Flood Insurance Program (NFIP) are needed to ensure policyholders pay actuarially sound premiums, allowing for a gradual transition away from situations where the Treasury is having to bail out the program.

"Many of those recently enacted higher premiums, however, currently face possible repeal in Congress because of the financial burden that they pose to policyholders," BPC pointed out in a recent report. "The political fallout was immediate when higher rates from Biggert-Waters went into effect in October 2013 for some policies that have historically been subsidized. The omnibus spending bill that passed on Thursday, January 16, effectively bars the NFIP from enforcing some of the higher rates, and the Senate is poised to take up legislation that would turn back the clock on more of them."

But doing this will ensure private capital is never able to jump back into the market at a significant rate to pick up the risk. Not to mention, the NFIP is already $24 billion in debt, the Government Accountability Office notes.   

The GAO conducted its own study, warning policymakers that private sector insurers will not pick up the slack unless they can charge premium rates that accurately account for the exposures they’re taking on. A carve back in premium hikes within the NFIP program will only exacerbate pricing differences, making it impossible for the private sector to compete, GAO says.

As for what Congress can do to get the private sector insuring more of these at-risk properties, GAO says Congress should eliminate subsidized rates and charge all policyholders full-risk rates.

"The Biggert-Waters Act eliminates some subsidized rates, but some have proposed delaying these rate increases," GAO said. "Doing so could address affordability concerns, but would also delay addressing NFIP's burden on taxpayers."

The government could also provide residual insurance by having the federal government insure the highest-risk properties that the private sector is not willing to insure, GAO says. If this were the case, the program would have a higher number of risky properties on its books, but fewer properties to handle overall.

Thirdly, GAO says the government could function as a reinsurer, charging a premium for assuming the risk of catastrophic losses.

But affordability concerns may be sparring a pushback against reforms. Even with homeowners screaming about prices, advocates of reform remain steadfast.

The Union for Concerned Scientists jumped into the debate, asking lawmakers not to go against Biggert-Waters by delaying it.

"Homeowners hit by insurance rate increases are understandably upset and calling for action from their senators," the group wrote. "But continuing to subsidize flood insurance through the NFIP is not the answer, especially in the face of growing flood risks from sea level rise. Affordability concerns are valid but there are better ways to help homeowners, particularly low-income and fixed-income property owners."

SmarterSafer.org, an advocacy group that has been pushing for flood insurance reform for years, noted House Speaker John Boehner, R-Ohio, will not support a repeal of the bill, but is open to changes.

Three researchers from the Bipartisan Policy Center also warn about allowing flood insurance to function in an environment that is not based on actuarial concerns.

"The omnibus spending bill that passed on Thursday, January 16 effectively bars the NFIP from enforcing some of the higher rates, and the Senate is poised to take up legislation that would turn back the clock on more of them," the center's researchers wrote.

"Even if a bill repealing most of the rate increases in Biggert-Waters is enacted, Congress should continue to insist on improvements to the NFIP rather than use this legislation as a reason to give up on making the NFIP fiscally sound."

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