National Flood Insurance Program
I am amazed at the amount of misinformation the media is spreading regarding the National Flood Insurance Program (NFIP). The most recent and perhaps the most egregiously uneducated piece was an Editorial titled “Flooding Taxpayers Again”, published by the Wall Street Journal on Dec. 1, 2013. This is especially disappointing as The Journal is such a well respected publication. However, this editor clearly spent no time at all researching the topic before irresponsibly spreading misstatements to readers. Here are the facts:
1. The National Flood Insurance Program is NOT subsidized by taxpayers. Not one cent. Rather, the taxpayers provide a line of credit that is used as policyholder surplus. Prior to Katrina, the NFIP has drawn from and re-paid on this credit line, with interest. Katrina and Sandy caused this credit line to balloon to an untenable level, but the NFIP is current in its re-payments, with interest. To date, the NFIP has not defaulted and Congress has not forgiven the debt, so the NFIP has not cost taxpayers one cent.
2. The NFIP has stated in its own Congressional testimony, in its own manuals and on its own Web site that the only properties that are not paying “actuarially correct” rates are those that were constructed prior to the NFIP. In other words, 80 percent of NFIP policies are written on properties that were constructed to FEMA requirements and are paying premiums that are “actuarially correct.” As such, the NFIP has not encouraged growth in flood prone areas. Rather, it has successfully established building guidelines that have mitigated risk and created a self-funding mechanism that has allowed over $45 billion of flood losses to be paid by those choosing to live in flood-prone areas rather than taxpayers. It has also helped prevent blight in older communities with older pre-existing structures that may occur in the absence of a flood insurance solution.
3. The cited measure that passed the House in June of 2013 did not in any way address the older properties that are not paying an “actuarially correct” rate. It proposed to delay the implementation of Section 207 of Biggert-Waters, which eliminates Grandfathering. Grandfathering creates certainty in the real estate market by shielding homeowners from wildly fluctuating premiums as rate maps are periodically revised. Grandfathering is not a subsidy. The NFIP has stated that it collects an adequate and ‘actuarially correct” premium from each risk class as a whole to pay its claims. Removal of Grandfathering is akin to requiring airlines to charge each passenger the exact same fare or requiring pre-existing structures to be updated each time a building/zoning code is revised.
4. The amount of private capital that would be required to completely privatize the National Flood Insurance Program is immense and prohibitive. While there may be a few insurers who enter the market on a limited basis, there are not enough to replace the NFIP.
Biggert-Waters went far beyond what was needed to fix the NFIP and created a great deal of collateral damage in the process. When Section 207 is implemented in late 2014 many more than the 20 percent of policies impacted by Section 205 will feel the effects.
The NFIP has stated that the only class of business that is not paying an “actuarially correct” premium is older structures that pre-date the program. The NFIP has also stated that this class is paying a rate of 40-45 percent of what is needed. Based on this, all Congress needed to do is require the NFIP to increase premiums for these policies (referred to as pre-FIRM) by 25 percent each year for 4 years. This simple solution would not have forced families out of their homes, created increased/unnecessary uncertainty in the real estate market or cost the taxpayer a single penny. And, it may have been simple enough for even the Editor of the Wall Street Journal to accurately convey.
-Christopher W. Heidrick, CPCU, ANFI