Housing trade groups are calling on Congress to reform flood insurance

Not surprisingly, the National Flood Insurance Program (NFIP) is up for renewal again in just over a month. But after seven years of short-term renewals, the housing and insurance industries are pushing for change.

“We are hopeful that the new Congress will reauthorize the program for the long term and also include certain reforms,” said Austin Perez, the National Association of Real Estate Agents senior insurance policy representative. “But one of the most important things we’ve done is ensure that while the longer-term reauthorization package is being worked on, we are advocating that Congress not let the program lapse.”

The NFIP was created by Congress through the National Flood Insurance Act of 1968 and has received 31 short-term extensions since the last long-term reauthorization expired in 2017. The program, which is managed by the Federal Agency for Emergency Management (FEMA), is a public-private partnership between the federal government, the property and casualty insurance industry, states, local officials, lending institutions and property owners.

Under the “write your own” program, the more than 50 private insurers that make up the NIV can write flood insurance policies for homeowners and buyers who need flood insurance. Funds to cover some claims are borrowed from the Ministry of Finance. The program is available in more than 22,000 communities across the country, but to be part of the NFIP, communities must adopt and enforce rules to reduce flood damage.

Since its inception, the program has received more than 2.6 million claims and currently protects approximately 4.6 million properties. In 2023 alone, the NIV received more than 21,000 claims, totaling approximately $1 billion in claim payments.

An impending disaster

One of the main reasons the NFIP covers so many properties is that loans backed by government sponsored enterprises (GSEs) required have flood insurance. If the NFIP expires, GSE-backed loan transactions can still close as the flood insurance requirement is suspended until the NFIP is reapproved.

In addition, private insurers that are part of the NFIP can still process and pay flood insurance claims, as long as the funds to pay these claims are still available.

“Many people think that real estate transactions will be disrupted when the NFIP expires, but the truth is that most transactions will continue,” Perez said. “The real problem, however, is that properties in flood-prone areas can be sold without flood insurance, putting buyers at risk.”

Perez said this issue is at the heart of the message NAR is sending to Congress about reauthorizing the bill next month.

Also advocating for another reauthorization of the NIV is Douglas Heller, director of insurance for the Consumer Federation of America (CFA). Like Perez and NAR, he and the CFA are very concerned about the consequences if the NIV were to expire.

“There are millions of people in America who depend on flood coverage to protect their most important asset,” Heller said. “To allow the public flood program to expire and hope for the private market to step in would be an even bigger disaster and lead to more problems than we have now, as the private flood insurance market is generally not financially protected by the public through taxes. or associations guarantee.”

When it comes to NFIP reforms, one of the main things trade organizations are calling for is a long-term expansion of the NFIP, which experts say would add some certainty to the market. “We need longer-term reauthorization,” Perez said. “The markets are not doing well with this uncertainty: Am I going to have flood insurance in 30 days or not?”

Insurers share a similar view.

“We would like to see a longer reauthorization,” said Sean Kent, senior vice president of insurance at FS Insurance Brokers. “If we’re optimistic, I think three years would be the best possible scenario, but even if we could get twelve months – because policy is written in twelve-month terms – that would give up the knowledge that if we write policy today, we will have support for it over the next twelve months.”

In addition to a long-term extension, Kent and others want to see changes in the way insurance premiums are determined through the NFIP.

“Standard insurance companies underwrite their insurance based on the actuarial risk rate, so if you live in a higher risk geographic area you will typically pay more for insurance, but the NFIP doesn’t necessarily work that way,” Kent said.

Instead of using discount rates, the NIV uses a risk assessment system to determine the risk of an area and the premium costs. Under this system, homeowners who are in a high flood risk area typically do not pay as much for their insurance as they would if they went through a private insurer. But some say this means that NIV prices are stricter than those of private insurers.

“Their prices are based on zones and elevations, while private insurance is more specific to the home itself,” says Ted Olsen, vice president at Goosehead insurance company. “Under the NFIP, all the houses on one street may have very similar prices, but under private insurance the house with a creek in the backyard will have a higher premium than someone else on the street that poses less flood risk.”

$21 billion in debt

While the NFIP system provides significant cost savings for some homeowners in high-flood risk areas, it has also led to some problems. “The program exists $21 billion in debt, because there is not enough equity in terms of underwriting and the way rates are determined,” said Kent.

A recent report published by researchers at the University of Connecticut and the London School of Economics and Political Science supported Kent’s financial concerns about the program.

“A ‘business as usual’ approach to flood mitigation will further increase NFIP debt and culminate in a sudden crash in the housing market beginning sometime around 2060,” the report said.

This research is largely consistent with a 2016 report by Freddie Macwhich predicts that $160 billion of the housing market will fall below sea level by 2050 – and $238 billion by 2100.

The report looks at properties on the US northeast coast that were hit by Hurricane Sandy in 2012. Before the hurricane, property values ​​in the region were rising “significantly faster than the national median.”

“Since Sandy, Northeast Coast properties have been a less competitive investment, with home value growth lagging the national median by about 25%,” the report said. “In the months since Hurricanes Helene and Milton, the U.S. has paid $480 million to repair 54,000 damaged properties. Despite the NIV-supported rehabilitation of the structures, market values ​​have not recovered; listed sales prices have fallen by approximately 15% at the time of writing.”

‘Failure of our government policy’

Along with these reforms, Bill Killmer, senior vice president for legislative and political affairs at the Association of Mortgage Bankerswould like to see greater participation in the program.

“I think in the aftermath of the last two natural disasters, especially the one in North Carolina with Hurricane Helene, we found that a lot of people didn’t have coverage, so we need to increase participation in the NFIP,” Killmer said.

At NAR, Perez believes an effective way to achieve this is to revamp the flood maps used to determine coverage areas and to better educate consumers about flood risks.

“Current flood maps do not cover most of the country. They are along the coastline, right near the ocean and then along major rivers like the Mississippi,” Perez said. “So when a storm like Harvey or Helene happens, we have cases where a significant portion of the flooding occurs outside of special flood hazard areas. Look at what happened in Asheville – FEMA doesn’t map places like that.”

At the CFA, Heller warns that failure to make changes to the NFIP, such as updated maps, will only increase the risk of events like the one in Asheville happening again.

“Asheville is a testament to the failure of our public policy and how exposed and under-resourced we are,” Heller said.

With the increased frequency of major flooding, Perez and NAR believe it is imperative to have a consumer-facing tool that allows homeowners and buyers to know their flood risk. As it stands now, Perez says buyers should use the NFIP risk assessment system to get a flood insurance quote.

“If you ask for a quote and it is very high, then you have to ask questions,” Perez said. “That is important information, and what Congress needs to do is provide FEMA with the means to send that information to a direct-to-consumer portal where they can see future flood risk data for their specific address.”

But homeowners aren’t the only ones Killmer would like to see greater participation from. He believes more private insurers could participate in the program, but don’t. As part of any NFIP reforms, Killmer would like to see more ways to encourage private insurers to participate, such as removing some barriers to entry.

While it remains to be seen whether any serious changes will come to the NIV in the near future, Killmer is optimistic that the new Trump administration will be friendly to the program.

“At a time when we have an affordability crisis in the housing market, this is certainly another layer of friction,” Killmer said. “I think we have a number of leaders on both sides — including Chuck Schumer in the Senate and Mike Johnson in the House of Representatives — who come from states like New York and Louisiana who are heavily dependent on the NFIP, so that they won’t allow it. program expires.”