Work Continues on Federal Flood Insurance Program

In late September, President Barack Obama signed a one-year extension of the National Flood Insur­ance Program (NFIP) into law.

The president’s signature on S. 3814, the “Flood Insurance Extension Act of 2010,†which extends the flood program until Sept. 30, 2011, marks a legislative victory for the Big “I†which continues to be a vocal advocate to reform the NFIP. It is expected that this one-year extension, which was enacted the day before the program was set to expire for the fourth time this year alone, will bring stability to the flood insurance marketplace.

The NFIP is congressionally authorized and requires periodic extension by Congress. Last year, Con­gress did not pass a long-term extension of the program and instead passed four separate short-term extensions. The Big “I†is concerned that the “stop and go†approach led to marketplace uncertainty for both agents and consumers.

The Big “I†has noted that Congress has traditionally extended the program for five-year periods in order to provide stability for the marketplace. Unfortunately, before the passage of this legislation, Con­gress had only recently extended the program for short periods, from 30 days to six months.

FEMA counts on the private insurance industry to sell flood insurance through a Write-Your-Own (WYO) program. FEMA reimburses WYO insurance companies for expenses incurred in providing polices and adjusting claims. Independent insurance agents are the primary distribution channel for flood insur­ance policies and agent commissions are paid by WYO companies from their reimbursement. More than 110,000 agents work with the 86 WYO participating companies.

The role independent agents play in the delivery process of flood insurance is different than that of traditional property-casualty lines. Agents must possess specialized expertise which requires updating their continuing education credits by attending flood classes and seminars, many of which are not offered in all states. An initial sale for one flood policy may require five to 10 manpower hours. Unfortunately, the workload agents undertake is often lost on those critics of the program and its private delivery.

The Big “I†also believes that Congress should modernize the program and protect it from the threat of insolvency in the future. Needed reforms include:

Modernize Coverages: The current NFIP has a number of gaps in coverage that leave consumers unprotected. The Big “I†is advocating for inclusion of optional business interruption insurance for com­mercial policyholders; an automatic, base amount of additional living expenses coverage for residential consumers with the option to purchase increased coverage; a base amount of finished basement cover­age on residential policies and optional, replacement cost coverage for contents and commercial build­ings. Each of these additional coverages should be priced at an actuarial level to both make the program more attractive to customers and help the program move toward a strong financial footing.

The current NFIP has a number of gaps in coverage that leave consumers unprotected. The Big “I†is advocating for inclusion of optional business interruption insurance for com­mercial policyholders; an automatic, base amount of additional living expenses coverage for residential consumers with the option to purchase increased coverage; a base amount of finished basement cover­age on residential policies and optional, replacement cost coverage for contents and commercial build­ings. Each of these additional coverages should be priced at an actuarial level to both make the program more attractive to customers and help the program move toward a strong financial footing.

Increase Maximum Coverage Limits: Limits have not been adjusted for inflation since 1994. The Big “I†is pushing for an increase in the maximum coverage limits above the current $250,000 residen­tial/$500,000 commercial limits to correspond with modern-day real estate prices.

: Limits have not been adjusted for inflation since 1994. The Big “I†is pushing for an increase in the maximum coverage limits above the current $250,000 residen­tial/$500,000 commercial limits to correspond with modern-day real estate prices.

Create Risk-Based Rates for Nonresidential, Vacation and Second Homes: The association is advocating gradually removing all subsidies for nonresidential, vacation and second homes by allowing the NFIP to increase rates annually until the full actuarial rate is realized.

: The association is advocating gradually removing all subsidies for nonresidential, vacation and second homes by allowing the NFIP to increase rates annually until the full actuarial rate is realized.

Recent history has provided ample evidence of the destruction left behind by floods that highlight the urgency and importance of both extending and updating the NFIP.

Margarita Tapia (margarita.tapia@iiaba.net) is the Big “I†director of public affairs.

Flashback to NFIP Roots

The NFIP was created as part of the National Flood Insurance Act of 1968 to help the federal government cover the cost of flood damages. Previ­ously, insurance companies generally did not offer coverage for flood disasters because of the high risk involved.

Federally-backed flood insurance is available to communities that agree to adopt and enforce flood-plain management ordinances designed to reduce flood damage.

Approximately 4.5 million people currently hold flood insurance policies in more than 20,000 participating communities. From 1969 to 2005, the NFIP paid a total of $12.7 billion for flood insurance claims and related costs. From 1986 to 2005, the NFIP was financially self-supporting for the average historical loss year, collecting approximately $2 billion in premiums per year. Consistent with statute, the NFIP borrowed from the U.S. Treasury during those years in which the U.S. experienced unusually high flood losses but repaid the Treasury with interest from policyholder premiums and related fees.

—M.T.