2011 is fast becoming the year of the natural disaster, and floods and their devastating consequences are leading the charge. Nowhere is that more clear than along the mighty Mississippi. Bu there is also news on the insurance side of the ledger, not just on the claims and loss side.
As those flood waters continued rising along the Mississippi River, a House committee has unanimously approved bipartisan legislation to extend the federal flood insurance program for five years and introduce financial reforms of the debt-ridden program.
The tide has turned on a flood insurance program that was in dire straits, facing huge deficits, the program has received a shot in the arm form Congress in shoring up its finances. The legislation (HR 1309) approved by the House Financial Services Committee on a 54-0 vote authorizes the National Flood Insurance Program (NFIP) until 2016 and phases out the program’s rate subsidies. Further shoring up the program the subcommittee has authorized gradually raising all premiums to reflect actual costs, improves the accuracy of flood maps and allows more public input into the mapping process.
In addition, the bill also adds two new coverage options, ties policy limits to inflation, and sets higher deductibles for rate-subsidized properties.
Insurance industry groups wasted no time in praising the House committee’s vote and urging the full House and the Senate to follow suit before the program expires this fall.
The NFIP, which is more than $17 billion in debt, is currently slated to expire on Sept. 30. It has been operating on short-term authorizations and has been criticized by fiscal watchdogs for under-pricing risk and by environmental groups for promoting development in environmentally-sensitive areas.
NFIP Current Program Details
The NFIP provides coverage for up to $250,000 for the structure of the home and $100,000 for personal possessions. Private flood insurance is available for those who need additional insurance protection, known as "excess coverage,” over and above the basic policy or for people whose communities do not participate in the NFIP. Some insurers have introduced special policies for high-value properties. These policies may cover homes in noncoastal areas and/or provide enhancements to traditional flood coverage. The comprehensive portion of an auto insurance policy includes flood damage.
2011 Disasters
Flood waters across the South and Midwest are on the rise after torrential rain and historically devastating tornados. Now flooding is occurring from Iowa, to Tennessee, to New Orleans. Everything is moving downstream to Louisiana and Louisiana Governor Bobby Jindal and the U.S. Army Corps of Engineers are hoping to provide relief by opening the Morganza Spillway on the Mississippi River upstream from New Orleans to reduce the possibility of downstream flooding. But they have needed time to get prepared and construct barriers to protect people and property from the "planned" spillway flood.
“Given the current flooding taking place on the Mississippi river, it is especially critical to get a long-term extension of the program in place so that this debate can move beyond Congress and residents in flood-prone areas can have the stability in the program they so desperately need to insure their homes and businesses,” said Leigh Ann Pusey, president and CEO of the American Insurance Association to the Insurance Journal.
HR 1309 Specifics
The House bill pushes the program to reduce subsidies in flood insurance rates in several ways. First the bill requires that rates for most properties be raised by 20 percent a year until they reach actuarially sound levels including commercial properties, vacation homes, repetitive loss properties, and homes that have had damage exceeding 50 percent of their value. The bill also raises the cap on increases for certain properties in the program, including commercial buildings, second homes, vacation homes, homes sold to new owners, homes that have had substantial flood damage and improvements, and homes that have had multiple flood claims.
For all other existing policyholders, rates would be allowed to go up within a flex-band of between 10 percent and 20 percent a year. Current law does not allow increases above 10 percent a year.
Also, rates for property owners in communities newly designated as in flood hazard zones would be move to cost-based pricing over a five-year span. Their rates would be start at 50 percent of the actuarial indications the first year, with 20 percent hikes each year thereafter until they are brought in line with what actuaries say they should be.
The bill sets minimum deductibles of $1,000 for properties being charged cost-based rates, and $2,000 for those with subsidized rates. Maximum coverage limits — currently $250,000 for residential structures, $100,000 for residential contents and $500,000 for commercial properties — would be indexed to inflation starting in 2012.
Summary
It took years of neglect and mismanagement by Congress, followed by the catastrophe of Hurricane Katrina to get us to this point. Post-Katrina band-aids were applied with stop-gap one year NFIP renewals with no long-term planning or reform.
Now, finally, Congress has taken some leadership and passed reforms through an initial subcommittee on a 54-0 unanimous vote. Based on that vote, it appears reforms will occur that solve some of the financial insolvency by re-working premium structures, in addition to consumer cost-shares with increased deductibles. We'll have to see if these reforms work, given where we are at the results may not be transendiary, but at least an attempt is finally being made.
While we have seen natural disaster after natural disaster, including historic floods in 2011, the end may not be in sight. Afterall, its only May.... and hurricane season has not yet begun.
