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The Week Ahead: Capitol Hill Analyzes Flood Insurance

On Wednesday, September 27 at 9:30 a.m. Central, the U.S. Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment will host a hybrid hearing titled, “The State of Flood Insurance in America.”

Slated to testify on the topic is Douglas E. Quinn, Executive Director of the American Policyholder Association (APA).

The National Flood Insurance Program (NFIP) is managed by FEMA, and is delivered to the public by a network of more than 50 insurance companies and the NFIP Direct.

Floods can happen anywhere, and just one inch of floodwater can cause up to $25,000 in damage. Most homeowners insurance policies do not cover flood damage, and flood insurance is a separate policy that can cover buildings, the contents of a building, or both.

The NFIP provides flood insurance to property owners, renters and businesses, and having this coverage helps them recover faster when floodwaters recede. The NFIP works with communities required to adopt and enforce floodplain management regulations that help mitigate flooding effects. Flood insurance is currently available to anyone living in one of the almost 23,000 participating NFIP communities. Homes and businesses in high-risk flood areas with mortgages from government-backed lenders are required to have flood insurance.

The NFIP is currently only authorized until September 30, 2023, and unless it is reauthorized or amended by Congress, the following will occur on September 30, 2023:

  • The authority to provide new flood insurance contracts will expire. Flood insurance contracts entered into before the expiration would continue until the end of their policy term of one year.
  • The authority for NFIP to borrow funds from the Treasury will be reduced from $30.425 billion to $1 billion.

The U.S. Government Accountability Office (GAO) recently issued a report on the NFIP, examining several objectives, including the actuarial soundness of Risk Rating 2.0; how premiums are changing; efforts to address affordability for policyholders; options for addressing the debt; and implications for the private market.

In analyzing the data, GAO reviewed FEMA documentation and analyzed NFIP, Census Bureau, and private flood insurance information. GAO also interviewed FEMA officials, actuarial organizations, private flood insurers, and insurance agent associations in its research.

As of April 1, 2023, FEMA fully implemented NFIP’s pricing methodology called Risk Rating 2.0. The methodology leverages industry best practices and cutting-edge technology to enable FEMA to deliver rates that are actuarily sound, equitable, easier to understand and better reflect a property’s flood risk.

The launch of Risk Rating 2.0 has aligned premiums with risk, but affordability concerns accompany the premium increases. FEMA had been increasing premiums for a number of years prior to implementing Risk Rating 2.0. By December 2022, the median annual premium was $689, but this will need to increase to $1,288 in order to reach full risk. Under Risk Rating 2.0, approximately one-third of policyholders are already paying full-risk premiums. Many of these policyholders had their premiums reduced upon implementation of Risk Rating 2.0. All others will require higher premiums, including 9% who will eventually require increases of more than 300%. Gulf Coast states are reporting the largest premium increases, as policies in these states have been among the most underpriced, despite having some of the highest flood risks.

“We recommended that Congress consider creating a means-based assistance program that's reflected in the federal budget,” said the GAO in its findings. “Risk Rating 2.0 does not yet appear to have significantly changed conditions in the private flood insurance market because NFIP premiums generally remain lower than what a private insurer would need to charge to be profitable. Further, certain program rules continue to impede private-market growth. Specifically, NFIP policyholders are discouraged from seeking private coverage because statute requires them to maintain continuous coverage with NFIP to have access to discounted premiums, and they do not receive refunds for early cancellations if they switch to a private policy. By authorizing FEMA to allow private coverage to satisfy NFIP’s continuous coverage requirements and to offer risk-based partial refunds for midterm cancellations replaced by private policies, Congress could promote private-market growth and help to expand consumer options.”

Testifying at the hearing will be APA Executive Director Quinn, a Marine Corps veteran who was living a comfortable life as an investment advisor on the Jersey Shore, until he lost his home in Superstorm Sandy. Although he had the maximum legal amount of flood coverage, his insurance company only offered him 37 cents on the dollar.

In the past, Quinn has fought FEMA, his insurance carrier, and the bureaucracy of a disaster recovery.

Due to his activism on behalf of consumers, Quinn was asked to take the helm as the Executive Director of the APA, a nonprofit organization whose mission is to protect American insurance consumers from fraud perpetrated by insurance company employees, as well as the engineering and adjusting firms they hire. Coming from a financial background, Doug believes strongly in the important role insurance plays as a risk management tool.

Click here for more information or to register for this event.

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About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.

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