Shutdown should focus attention on common-sense flood insurance reform

As the partial federal government shutdown drags on, numerous agencies have closed shop or are operating with a skeleton crew. That includes the National Flood Insurance Program (NFIP), the government-run insurer intended to help Americans recover from floods. With more than 5.1 million policies providing over $1.3 trillion in coverage, the NFIP is by far the biggest flood insurer for both residential and commercial properties in the U.S.

Over the last few months, calls for overhauling the program have intensified, and for good reason. The NFIP has accumulated $20.5 billion of debt to the U.S. Treasury while its operating expenses are estimated to outstrip its revenues from premiums by about $1.4 billion annually — and that’s assuming that no major disasters like Hurricane Katrina or Superstorm Sandy strike.

Despite these challenges, lawmakers continue to put off meaningful reforms to how the federal government approaches flood insurance.{mosads}

When Congress voted last December to keep the NFIP afloat until May 31, 2019, it was the program’s tenth short-term extension since September 2017. That’s right, over a 14-month period, lawmakers kicked the can down the road ten times instead of passing a long-term fix to address the NFIP’s fiscal challenges.

With NFIP operations at a stand-still due to the shutdown, it might be a good time for Congress to consider reforming this badly dysfunctional agency to ensure that it continues to serve the millions of Americans who count on it when disaster strikes.

There’s no shortage of ideas. Earlier this month, Congressman Blaine Luetkemeyer of Missouri introduced several pieces of legislation that would set the NFIP on a more sustainable fiscal path. The Taxpayer Exposure Mitigation Act, for example, would require FEMA, the NFIP’s overseer, to purchase reinsurance to transfer the risk of flood losses to the private market instead of saddling taxpayers with the bill. The NFIP has already begun using reinsurance to mitigate some of its financial exposure, but it needs to go further, following the example of programs like Fannie Mae and Freddie Mac. The program needs to push its risk to the private sector, and purchasing reinsurance will help accomplish that.

Rep. Luetkemeyer has also reintroduced a bill to require the NFIP to calculate premiums based on a property’s replacement cost value, instead of using national averages that fail to account for significant disparities in property values across different regions. By relying on national averages to set rates instead of more detailed, property-specific information commonly used in the private sector, the NFIP tends to undercharge wealthy, coastal customers and overcharge lower-income homeowners.

As a result, policyholders in less expensive homes subsidize those in more expensive ones. Ending this unfair practice by charging homeowners accurate premiums would go a long way in rebalancing the NFIP’s finances.

Another measure, the Community Mapping Act, would allow states and communities to develop their own flood maps, as long as they meet rigorous standards. At present, flood mapping is controlled by bureaucrats in Washington. Partly because of this centralization of power and lack of local input, the majority of the NFIP’s flood maps are do not accurately reflect flood risk, according to a recent Inspector General report. Letting states and localities play an active role in developing flood maps would empower those who know their communities best and help the NFIP craft its policies on a foundation of factual information.

These reforms are a good start.

The new Congress should hold hearings to debate and discuss these proposals — and others — before the NFIP’s extension expires this June. Postponing meaningful reform may be politically expedient, but it will only make the problem worse. American Consumers deserve better. 

Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. Follow on Twitter @ConsumerPal.