Written By: Joel Palmer, Op-Ed Writer
The National Flood Insurance Program (NFIP), set to expire in the coming weeks, was extended by President Trump earlier this month. But its future is as challenging to forecast as the path of an Atlantic hurricane.
The extension was part of Congressional legislation that also raised the debt limit and authorized emergency funding for victims of Hurricane Harvey. Without it, the NFIP would have expired on Sept. 30. Now it’s been reauthorized through December 8, 2017.
It’s anticipated that Congress and the White House will spend the next two months creating legislation that will reform the program, not just renew it.
The need for reform has only grown larger with the impact of Hurricanes Harvey and Irma this month; NFIP estimated it will make $11 billion in flood claims payments just from Hurricane Harvey, which drenched Southeast Texas.
Prior to these two natural disasters, the Congressional Budget Office estimated that the NFIP will have a one-year shortfall of $1.4 billion.
CBO has proposed several approaches to improve program solvency and align premiums with risk, including:
• Increasing fees or surcharges
• Targeting policy sales in a way that contribute to a surplus, such as to commercial properties that pay higher surcharges
• Reducing subsidies and targeting them to low-income policyholders
• Encouraging high-deductible policies
• Adjusting premium rates for property value
The median annual premium for residential coverage under an NFIP policy in effect on August 31, 2016, was $520.CBO’s analysis shows that premiums for primary single-family homes generally amount to less than 1 percent of household income.
At the same time, floods are becoming more widespread and costly. According to the Federal Emergency Management Agency (FEMA), more than 20 percent of flood claims come from properties outside designated high-risk flood zones. In fact, 98 percent of counties in the U.S. have been impacted by at least one flooding event. The average flood payout claim from NFIP is $43,000.
While the extension provides a short-term solution to this problem, the insurance industry has called for comprehensive reform to provide a long-term fix.
Jimi Grande, senior vice president of government affairs for the National Association of Mutual Insurance Companies, said “no one should be celebrating a short-term extension. Congress has had five years since the last reauthorization to reform the NFIP, and the problems facing the program have been starkly evident since at least the 2005 storm season.”
There is a bill currently in flight that would renew NFIP through 2022. H.R. 2874, also known as the 21st Century Flood Reform Act, would “make a number of changes to the NFIP aimed at improving the financial status of the program and encouraging the growth of a private market for flood insurance.”
CBO estimates the bill would increase collections from NFIP policyholders but would reduce the number of property owners who purchase flood insurance through the program. It would reduce direct spending by $187 million over the next 10 years while increasing revenue by $4 million. CBO also estimates that enacting H.R. 2874 would increase revenues by about $4 million over the 2018-2027 period.
In the meantime, the short-term extension will help the real estate sales and mortgage industries through the busy fall season.
National Association of Realtors President William E. Brown said the failure of extending NFIP would have led to 40,000 lost or interrupted sales a month, in addition to homeowners losing coverage upon policy expiration.
But with several legislative priorities facing Congress and the Trump administration, including tax reform and immigration, it’s unclear whether meaningful reform legislation can be passed before the next expiration date in December.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.