Volume XVIII No. 45

The tragic storm season of 2005 included not only Hurricane Katrina, but also Hurricanes Rita and Wilma. Those three storms are among the ten most costly natural disasters in U.S. history, and when coupled with the 24 other named storms that year, left the National Flood Insurance Program nearly $18 billion in debt to the Treasury.

Seven years after Katrina, the federal flood insurance program was still more than $17 billion in debt and in need of serious reform. After years of debate the Biggert-Waters Flood Insurance Reform Act was passed in July of 2012. It wasn’t perfect legislation and certainly wasn’t the bill that Taxpayers for Common Sense would have drafted, but it represented a couple steps in the right direction. Key among the reforms were efforts to move previously subsidized flood insurance policies toward risk based rates. The reforms dealt with two major categories of properties: those that had been receiving explicit subsidies, in some cases paying only 35 percent of the risk-based rate for decades; and those that had benefitted from “grandfathering” where although changing conditions may have  increased their flooding risk, the property owners retained the old lower rate in perpetuity. In both cases rate increases were to be phased in over several years.

After Superstorm Sandy hit in October 2012, the program sank to being roughly $24 billion in debt, and the bizarre response of some lawmakers has been to jettison reforms and return to subsidies as usual.

Dozens of lawmakers, led by Senators Landrieu (D-LA) and Vitter (R-LA) along with Sens. Menendez (D-NJ) and Isakson (R-GA) want to effectively delay rate changes associated with new maps for four years. Considering Biggert Waters expires September 30, 2017 that would essentially eliminate the reform by delaying it to death.

While this may be financially attractive to some of their constituents, delay would be bad from a disaster risk point of view, stick the tab on taxpayers and other policyholders, and destabilize the home sales market.

A lot of this opposition is based on anecdotal stories of exorbitant rate increases, some to the tune of tens of thousands of dollars. First off it’s hard to believe there’d be a $28,000 flood insurance rate. The program only insures up to $250,000 in property value plus another $100,000 for contents. If FEMA sets your rate at $28,000, that means they assume a total loss every decade or so. That homeowner’s problem isn’t a high flood insurance rate– it’s their extreme risk of severe flooding. If the maps that identify flood risks are wrong as some say – then they should be fixed. A bad map does nobody any good and that’s why Biggert Waters included a panel to review technical and scientific challenges to maps.

Secondly, FEMA is required to set premiums that in aggregate (across all 5.5 million policies) will generate enough revenue to offset the average historical loss year. Biggert-Waters requires that average to be a real average, previously FEMA severely discounted “outlier” loss years like 2005 (only given 1 percent weight). So premiums are going to be going up across the board. But if anti-solvency lawmakers got their weigh, a chosen few would have their subsidized rates locked into place, forcing every other policy holder to pay even more to make up the difference. In addition, remapping doesn’t increase premiums on everyone, some receive reduced premiums due to mitigation measures and some are mapped out of the floodplain. All of those people who have lower risks of flooding would be forced to pay more under the lawmakers proposal.

Lastly, one of the arguments the subsidy seekers have been making is that rate increases have thrown a wrench in the housing market. Besides the fact that there has been article after article that home sales are booming, even in Louisiana, New Jersey, and Florida which have been complaining the loudest, a delay would be far more destabilizing. What any market craves is certainty. Delaying rate increases for four years pending some government study is the furthest thing from certainty. Preparing to sign on the dotted line for a 30-year mortgage, the last thing a prospective home buyer needs is to not know how much their monthly insurance costs will be.

No legislation is perfect, and problems identified by opponents could be dealt with in a targeted manner that doesn’t throw the reform baby out with the bathwater. Rate increases could be phased in more gradually. Means-tested premium and mitigation assistance could be provided without burdening taxpayers through a small surcharge on all flood insurance policyholders.

Taxpayers and flood insurance policyholders need real solutions, not feel good quick fix promises that don’t do anything to solve the severely troubled programs problems. The snake oil solution of delay may provide good opportunities for lawmakers to pander, but it forces taxpayers and other policyholders to pick up more than their fair share so that a few can hold on to subsidies they have had for decades. It’s time for reform to take hold or the program to end.