After Harvey, Congress can’t ignore broken government flood insurance

We do not know the full implications that the tragic recent storm in Texas and Louisiana will reveal to us, but we can already see some critical questions that Congress must consider about how to mitigate extreme damage to our fellow Americans in flooding situations as it ponders reauthorization of the National Flood Insurance Program (NFIP). 

First, Congress must answer a critical question: Why are we building so many structures in very high-risk areas of the nation?

{mosads}When I ran the NFIP in the 1970s, I saw a far-sighted idea that Congress put into action. Congress brilliantly embedded long-range planning into the program: in exchange for subsidies for flood insurance on then existing homes and businesses, communities would enact and enforce land use measures to steer construction away from high-risk areas and elevate all structures above the 100-year flood level. Only pre-1970s structures would be subsidized.

Unfortunately, the program has miserably failed to enforce building and land use codes.

Congress should determine if FEMA, or, perhaps, the Government Accountability Office (GAO), needs to audit communities to make sure land use and building code rules are being enforced. Communities that do not enforce these rules should be expelled from the NFIP. The nation can no longer afford unbridled and unwise construction in our flood plains. 

And as flood risk worsens with climate change, is FEMA capturing the new danger through adding “freeboard” to the maps or through other means? Congress needs to find out.

Lax building codes are not just a cause of the problem, they are also supported by new congressional subsidies, such as grandfathering premiums so they do not rise as flood risk increases. These have flipped the program from one that discourages unwise construction to one that encourages it.

Congress tried to fix the premium shortfall of NFIP with the Biggert-Waters Act of 2012, but as soon as premiums began to move toward actuarial levels and some key constituents screamed, Congress chickened out and reversed course. The tension between creating a sound NFIP and placating constituents seems always to be resolved in favor of premiums that are too low. Since risk is not meaningfully captured in the premiums, NFIP has become fake insurance that misleads people into inhabiting high-risk flood plains.

These low prices distort the market and encourage construction and purchase of unsafe buildings. Congress must eliminate all subsidies except those targeting the truly poor, who do need help affording required flood insurance if full, actuarial rates are charged. Today, most subsidy dollars flow to the rich and the politically connected — that must end.

Instead of addressing this head-on, some in Congress propose to enlist private insurers to write some of the flood risk. But how will these insurers compete with all of these subsidized premiums? Only by cherry picking homes and businesses with adequate or excessive prices, further increasing the losses NFIP will suffer when disasters strike, since spread of risk will be eroded. If we don’t address the subsidies, private insurers will only take the least risky policies, undermining efforts to move the NFIP into private insurance portfolios and, eventually, toward having flood insurance as part of standard homeowners policies. 

Second, Congress must ask: why so few people are insured, especially since so many policies have subsidies? Only about 15 percent of the people in Houston have flood insurance. 

After 50 years, why is that? 

We pay NFIP’s Write Your Own insurers (WYO) a lot of money to, among other services, help gain market penetration. Additionally, lenders are supposed to require flood insurance as a condition of every mortgage in high-risk flood zones.

People damaged in the Houston flood are saying that they did not know their home could flood. Shouldn’t reauthorization include a requirement of making such risk information available to potential property owners?

The number of policies in Houston declined by 25,000 policies (nine percent) since 2012. Nationally, homes covered for flooding dropped by 2 percent in 2016 alone. Congress needs to determine why this is happening, including if the WYO companies are not up to the job and if the banks are not enforcing coverage requirements.

Third, Congress needs to figure out what to do when NFIP runs out of money this year. FEMA has only $1.7 billion on hand to pay claims and an additional borrowing authority of $5.9 billion, a total of $7.6 billion to pay Harvey claims. 

When the money runs out, as it will from the huge Harvey impact, Congress has no choice but to raise the borrowing authority to pay the claims, which have the full faith and credit of the United States behind the flood insurance policies the government writes.

Will this renewed dipping into the taxpayers’ pocket convince Congress to finally get serious about finding ways to make the program more self-sufficient? 

Fourth, the NFIP pays private insurers far too much to service flood policies. Will Congress do something about it? 

This year, as the costs of settling Harvey claims come in, the WYO insurers will reap a windfall profit.

In 2007, GAO found that FEMA paid out between $619.2 million to $1.6 billion to WYO insurers, “or from more than a third to almost two-thirds of the total premiums paid by policyholders to the NFIP for fiscal 2004 through 2006.”

This was an “unprecedented number and dollar amount of claims for damages resulting from major hurricanes and floods.”

If one-third to two-thirds of NFIP’s already inadequate premiums are gobbled up in insurer overhead, NFIP will never come close to breaking even, much less paying back the pre-Harvey deficit to taxpayers of $25 billion. Congress must rein in these bloated payments.

Congress was divided and confused about the direction to go in reauthorizing the NFIP before Hurricane Harvey struck, making thoughtful reauthorization by the end of this month impossible.

Harvey raises new and complex questions demanding congressional consideration in the reauthorization. Since fully understanding and incorporating the lessons of Harvey into the reauthorization bill simply cannot be accomplished by the end of this month, Congress should enact a short extender of, say, six months, so legislation can be drafted that addresses all the questions that Harvey has put into focus.

J. Robert Hunter is the director of Insurance for the Consumer Federation of America. He previously served as Federal Insurance administrator (includes the National Flood Insurance Program) under Presidents Ford and Carter and also served as Texas Insurance Commissioner. He is an actuary with over 50 years of insurance experience.