[DOCID: f:sr271.109]
From the Senate Reports Online via GPO Access
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Calendar No. 498
109th Congress Report
SENATE
2d Session 109-271
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FLOOD INSURANCE REFORM AND MODERNIZATION ACT OF 2006
_______
June 28, 2006.--Ordered to be printed
_______
Mr. Shelby, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following
R E P O R T
together with
ADDITIONAL VIEWS
[To accompany S. 3589]
The Committee on Banking, Housing, and Urban Affairs,
having had under consideration an original bill (S. 3589) to
amend the National Flood Insurance Act of 1968, to restore the
financial solvency of the flood insurance fund, and for other
purposes, having considered the same, reports favorably thereon
and recommends that the bill do pass.
Introduction
On May 25, 2006, the Senate Committee on Banking, Housing,
and Urban Affairs considered a Committee Print, entitled ``The
Flood Insurance Reform and Modernization Act of 2006,'' a bill
to modernize and bring financial solvency to the National Flood
Insurance Program, and for other purposes. The Committee voted
unanimously to report the bill (S. 3589) to the Senate.
Background
Congress established the National Flood Insurance Program
(NFIP) in 1968 to provide policyholders with partial insurance
for flood related damage. Communities that chose to participate
in the program were required to undertake mitigation efforts to
limit flood related damage as well as to implement stringent
building codes for all new development. The goal of mitigation
was to ensure that people were protected from flood related
damage by requiring that they take steps to increase the
durability of their homes. The program was to generate
sufficient funds through premium dollars to reduce taxpayer
exposure to massive liabilities for disaster-related assistance
due to flooding. During its early stages, the NFIP had about 1
million policyholders and covered roughly $50 billion of risk
exposure. Many of the stated goals of the NFIP have failed to
be met.
At the inception of this program, Congress built in
explicit subsidies for business properties and homes known as
pre- flood insurance rate map (pre-FIRM) structures. Congress
believed that it was inequitable to require all structures to
immediately pay actuarial prices given that the owners had no
notice that they were within the mandatory purchase area for
flood insurance. It was expected that many, if not all of the
pre-FIRM structures would be destroyed and rebuilt or mitigated
within a reasonable amount of time. Therefore, Congress
employed no mechanism to eliminate the subsidy given to these
structures at the inception of the program. However, today,
despite expectations to the contrary, more than 25 percent of
all the structures covered under the flood insurance program
continue to remain explicitly subsidized. The Congressional
Budget Office estimates the program collects about 60 percent
of the premiums needed for actuarial balance, leaving a cost to
taxpayers estimated at $1.3 billion per year.
In addition to the explicit subsidy the effectiveness of
the program has been reduced because of the inadequacies of the
flood maps. The flood insurance rate maps (FIRMS) are used to
determine flood risk, which is used for setting policy rates
and determining building standards. The data used for the FIRMS
in some areas is now more than 30 years old. Indeed, in areas
of southern Mississippi impacted by Hurricanes Katrina and
Rita, the flood elevation data was off by as much as 20 feet.
Without accurate flood maps it is exceptionally difficult to
gauge risk and thereby accurately price flood insurance
coverage. Additionally, and more importantly, without a true
understanding of the danger involved, it is impossible to
ensure safety in new design and construction. Ultimately, the
use of inaccurate maps has significantly impaired the effective
operation of the program.
When Congress created the NFIP in 1968, no structure within
the program was required to maintain flood insurance until the
flood maps were completed in 1973. From 1968 until 1973, very
few owners of structures within known flood risk areas took the
initiative and purchased flood insurance. Since 1973,
participation in the NFIP is mandated for properties within the
100-year flood plain that have a federally related mortgage on
the property, and such mandatory participation is enforced
through federal banking regulations. Structures in areas known
as ``residual risk areas'' behind levees and dams and those
without a federally related mortgage within the 100-year flood
plain are currently not required to maintain flood insurance.
Although any person owning a structure may choose to
voluntarily participate, many structures within the 100-year
flood plain that had a mortgage from a state-chartered
institution without federal deposit insurance or who did not
have a mortgage simply chose not to participate.
Notwithstanding the decision of many of the owners of these
structures not to participate, all of the structures within the
100-year flood plain and areas of residual risk are exposed to
heightened risk. The NFIP has failed to adequately inform and
require all people with structures located within the 100-year
flood plain and areas of residual risk to obtain and keep
current flood insurance on their properties.
In 1986, in an effort to increase the effectiveness of this
program, the NFIP reached out to form a public-private
partnership with private insurance companies. The partnership
was such that the private insurance companies, known as Write
Your Own (WYO) companies, would handle the task of
administering the program on behalf of the NFIP in order to
promote participation. The WYO companies receive a fee to cover
the cost of administering the flood insurance program, but
profit was not to be a part of the fee. Today, 96 WYO companies
participate in the administration of the NFIP, and they receive
fees of 30.8% of all premiums collected. This percentage is
derived from the administrative costs of five other lines of
private insurance that have similarities to the administrative
costs associated with the NFIP. The actual costs incurred by
the WYO companies in administering this program remain unknown.
The NFIP has grown considerably over the past 38 years from
1 million policyholders and $50 billion of risk exposure to
nearly 5 million policyholders and $900 billion of risk
exposure. This program, however, has not been fully self-
sustaining. Although, the hurricane season of 2005 finally
demonstrated the inability of this program to sustain itself,
there were prior instances where Congress took remedial actions
in order to sustain this program before 2005. In 1986, Congress
was forced to completely forgive nearly $1 billion of debt that
this program had incurred. Additionally, prior to the 2005
hurricane season, the NFIP already owed the United States
Treasury several hundred million dollars. Finally, because the
NFIP does not attempt to maintain reserves, it cannot operate
without the financial assistance of the U.S.
In addition to many of the immediate concerns outlined
above, several outstanding issues remain unknown. For example,
it is still unclear whether the administrative fees paid to the
insurance companies accurately reflect the cost associated with
administering this program. Also, it is not immediately evident
whether the private insurance market is capable of underwriting
a larger amount of risk associated with flood events. Most
important of all, it remains to be seen if the Federal
Emergency Management Agency (FEMA) is capable of administering
this program, or whether this program should be re-organized
into another federal agency.
Purpose of the Legislation
This legislation makes several key reforms in order to
ensure sufficient future premium income to pay new claims
without relying on the American taxpayer. Several of the
explicit subsidies built into the program during its 1968
inception will be phased out within a reasonable time. Pre-FIRM
structures that are non-primary residences, business, severe
repetitive loss properties, and cumulative loss properties will
have their subsidies gradually eliminated. In addition, all
state-chartered financial institutions will be required to
maintain flood insurance on all mortgaged properties within the
100-year flood plain. Also, properties located in ``residual
risk areas'' behind manmade structures such as levees and dams
will be required to purchase and maintain flood insurance, and
minimum deductible levels for all structures within the program
have been adjusted to accurately reflect inflation. Finally,
every single structure within this program will go through a
comprehensive rate review as the flood maps are updated in
order to accurately assess the risk associated with each
individual structure.
The NFIP incurred massive liabilities as a result of the
2005 hurricane season. This legislation eliminates the NFIP's
existing debt obligations. The legislation, however, also
requires the NFIP to set up a reserve fund in order to ensure
that the NFIP has adequate funds. The fund seeks to make the
entire program function more like an insurance program by using
reserves to pay claims during high loss years while building
reserves during lower loss years.
In addition to the immediate changes to this program, this
legislation requires the GAO and others to undertake a
considerable number of studies on every aspect of the NFIP.
These studies include a full financial audit of the program, an
in-depth review of the relationship between the NFIP and the
WYO Companies to determine the actual cost to administer this
program. The studies also seek to determine the necessity for
continuing any subsidy within the program. The studies will
look at whether this program should be expanded or limited
based on the availability of private flood insurance. Finally,
the studies will seek to determine if FEMA is capable of
administering this program, or whether this program should be
reorganized into another federal agency. This program is
required to be re-authorized during the next Congress, and it
is the intent of this Committee to use the studies to determine
the manner in which this program should be further reformed.
Hearings
The Committee heard testimony in the 109th Congress on
February 2, 2006, regarding proposals to reform the national
flood insurance program. The witnesses testifying were: Mr.
David Conrad, Senior Water Resources Specialist, National
Wildlife Federation; Ms. Regina Lowrie, Chair, Mortgage Bankers
Association; Mr. J. Robert Hunter, Director of Insurance,
Consumer Federation of America; Mr. David Pressly, President,
National Association of Homebuilders; Mr. Paul Gessing,
Director of Government Affairs, National Taxpayers Union; Mr.
David John, Research Fellow, The Heritage Foundation; and Ms.
Pam Pogue, Chair, Association of State Floodplain Managers.
The Committee had previously heard testimony on January 25,
2006, regarding proposals to reform the national flood
insurance program. The witnesses testifying were: The Honorable
David Walker, Comptroller General, United States Government
Accountability Office; Mr. David Maurstad, Acting Director,
Mitigation Division, Federal Emergency Management Agency; and
Mr. Donald Marron, Acting Director, Congressional Budget
Office.
The Committee initially heard testimony on October 18,
2005, regarding proposals to reform the national flood
insurance program. The witnesses testifying were: Mr. David
Maurstad, Acting Director, Mitigation Division, Federal
Emergency Management Agency; Mr. William Jenkins, Director of
Homeland Security and Justice, Government Accountability
Office; Dr. Chris Landsea, National Weather Service, National
Oceanic and Atmospheric Administration; Mr. Robert Hunter,
Director of Insurance, Consumer Federation of America; Mr. Doug
Elliott, President, Center on Federal Financial Institutions;
Mr. Robert Hartwig, Senior Vice President and Chief Economist,
Insurance Information Institute; Mr. Chad Berginnis, Chief
Financial Manager and Immediate Past Chair, State of Ohio on
behalf of the Association of State Floodplain Managers; and
Professor Mark Browne, Gerald D. Stephens CPCU Chair in Risk
Management and Insurance School of Business--University of
Wisconsin.
Section-by-Section Analysis of the Legislation
Section 1. Title
This section contains the short title of the bill, ``Flood
Insurance Reform and Modernization Act of 2006.''
Section 2. Findings
This section contains the Committee's findings that the
flood insurance program is bankrupt, and is no longer a
sustainable program under its current structure. Major reforms
must be made to this program including but not limited to
subsidy reductions/eliminations, map modernization, cost
analysis for greater efficiency within the write your own
insurance program, stricter compliance of mandatory coverage,
and increased participation;
Section 3. Definitions
This section defines the terms 500-year flood plain and
100-year flood plain.
Section 4. Reform of premium rate structure
Subsection (a) excludes several pre-FIRM properties from
continuing to receive explicit subsidies as follows: non-
primary residences; any severe repetitive loss property; any
business property; any property that has incurred damage in
amounts exceeding its current FMV; any property which has
sustained substantial damage exceeding 50 percent or
substantial improvement exceeding 30 percent of its current
fair market value.
Subsection (b) of this section changes the annual premium
increase for the program as follows: the overall maximum annual
premium increase is changed from 10 percent per year to 15
percent per year; the premium increase for phasing out the
subsidized properties under subsection (a) of this section is
25 percent per year until that property is no longer subsidized
under this program.
Section 5. Mandatory coverage areas
This section requires the Director to issue an amended
final regulation defining special flood hazard areas to include
areas known as residual risk areas located behind manmade
structures such as levees and dams. Residual risk areas are
areas that would otherwise be within the 100-year flood plain
but are currently not required to obtain flood insurance
because they are protected by manmade structures such as levees
and dams;
Subsection (c) of this section creates a limitation that
does not require mandatory participation within the flood
insurance program for structures that are in residual risk
areas until such time as all residual risk areas are mapped
that the Director deems essential to carrying out the flood
insurance program.
Section 6. Premium adjustment
This section states that all rates within the program are
subject to an adjustment each time a flood insurance rate map
is updated.
Section 7. State chartered financial institutions
This section requires that by December 31, 2008, as a
condition of state participation in the national flood
insurance program that lending institutions chartered by the
states, and not insured by the Federal Deposit Insurance
Corporation, shall be subject to regulations by that State that
are consistent with the requirements for federal depository
institutions with regards to maintaining flood insurance on
mortgaged properties within the 100-year flood plain.
Section 8. Enforcement
This section increases the cap on civil money penalties
from ``$350,'' per violation to ``$2,000'' per violation
against lenders for violations under this Act. This section
also states that this is a cap, and regulators may levy fines
under the stated $2,000 per violation cap where they deem
necessary and appropriate. This section also eliminates the
$100,000 annual cap on fines that can be levied against
lenders.
Section 9. Escrow of flood insurance payments
This section requires that lending institutions place flood
insurance payments into an escrow account on behalf of the
borrower. This section shall apply to any mortgage outstanding
or entered into on or after the expiration of the 2-year period
beginning on the date of the enactment of this Act.
Section 10. Financing of funds from the Treasury
This section authorizes the Secretary of Treasury to
provide funds to cover obligations of the NFIP for the 2005
hurricane season.
Section 11. Borrowing authority debt forgiveness
This section completely eliminates any obligations owed to
the United States Treasury by the National Flood Insurance
Program for the 2005 hurricane season. This section also
decreases the borrowing for the program from $20.775 billion to
$1.5 billion.
Section 12. Minimum deductible levels for claims
This section sets the minimum annual deductible for pre-
FIRM structures at $2,000, and post-FIRM structures at $1,000.
All deductibles are on annual basis, and once the deductible
has been met, no further deductible is required for that year.
Section 13. Considerations in determining chargeable premium rates
This section requires an examination of all years within
the program including catastrophic loss years to determine the
appropriate historical loss average.
Section 14. Reserve fund
This section creates a reserve fund of up to 1 percent of
all risk exposure in force and effect within the program. In
order to achieve the appropriate reserve fund level, this
section sets up a mechanism to achieve the target 1 percent
ratio within 10 years. This section also gives discretion to
the Director to report to Congress if hitting the reserve
target ration for any given fiscal year would have serious
negative implications for the overall program.
Section 15. Repayment plan for borrowing authority
This section requires that if the NFIP exercises its
borrowing authority, the Director must submit a repayment plan
to both the Secretary of Treasury and to Congress.
Section 16. Technical mapping advisory council
This section creates a new technical mapping advisory
council similar to the one established in the 1994 amendments
to the Act. The additional participants to the original council
include the Office of Management and the Budget (OMB), the Army
Corp of Engineers, and a representative from the Department of
the Interior, respectively.
Section 17. National flood mapping program
This section requires the NFIP, with the guidance of the
Technical Mapping Advisory Council, to map the 500-year flood
plain and areas of residual risk as well as updating the 100-
year flood plain. This section directs the NFIP to use the
latest technology and the most accurate flood elevation data in
creating and updating the flood maps.
Section 18. Removal of limitation on state contributions for updating
flood maps
This section lifts the prohibition of states contributing
more than 50 percent to map modernization in order for States
to effectively and efficiently update and maintain their maps.
Section 19. Non-mandatory participation in 500-year flood plain
This section states that it is not mandatory for
individuals who reside in the 500-year flood plain to obtain
flood insurance, however it requires the Director to notify the
communities within the 500-year flood plain to give them notice
that their communities are in elevated flood risk areas.
Section 20. Notice of flood insurance availability under RESPA
This section amends 5(b) of the Real Estate Settlement
Procedures Act (RESPA) by requiring the Secretary of Housing
and Urban Development to include in the booklet distributed an
explanation and availability of flood insurance.
Section 21. Testing new flood proofing technologies
This section requires the NFIP to allow testing of any new
type of flood proofing technology and states that such
structures may not be construed to be in violation of any flood
risk mitigation plan developed by that State or community and
approved by the Director of FEMA.
Section 22. Participation in state disaster mediation programs
This section requires the NFIP, upon request of a state
insurance official, to participate in state non-binding
mediation claims where there are multiple insurance claims on
the same subject property.
Section 23. Reiteration of FEMA responsibilities Under 2004 reform act
This section requires the Director to submit a report to
Congress every thirty days detailing the progress made on
implementing the requirements of the appeals process of section
205 of the 2004 Flood Insurance Reform Act until such time as
the process is fully implemented.
Section 24. Studies, audits, reports
This section requires a number of reports, audits and
studies that are due to the Committee within one year from the
date of the enactment of this Act. The Committee believes
several critical areas of the flood insurance program must be
improved upon in the coming years. Therefore, the Committee has
asked the GAO and others to produce several in-depth reports to
Congress detailing where improvements to this program must be
made. Subsection (a) requires GAO to conduct an in-depth study
on the Write Your Own program that shall include consideration
of alternatives to the current structure of the WYO system.
Subsection (b) requires a complete audit of the NFIP by GAO
including the $23 billion dollars spent on claims during the
2005 hurricane season. Subsection (c) also requires the
Director of the NFIP to submit an annual report detailing all
financial aspects of the program for the preceding year.
Subsection (d) requires the GAO to study the effects that
expanding flood insurance beyond the current caps might have on
the private insurance market. Subsection (f) requires the
Secretary of Treasury to conduct a study and submit a report to
Congress on the remaining subsidies within the program.
Subsection (g) requires GAO to study the effects of allowing
individuals from non-participating communities to purchase
flood insurance through the NFIP direct program.
Cost of Legislation
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 26, 2006.
Hon. Richard C. Shelby,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Flood Insurance
Reform and Modernization Act of 2006.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Julie
Middleton.
Sincerely,
Donald B. Marron,
Acting Director.
Enclosure.
Flood Insurance Reform and Modernization Act of 2006
Summary: The Flood Insurance Reform and Modernization Act
of 2006 would provide the National Flood Insurance Program
(NFIP) with funds to pay remaining valid claims from the 2005
Gulf Coast hurricanes and reform the program, which is
currently in an unsustainable financial position. Without a
change in law, the NFIP will be unable to pay all flood
insurance claims promptly, and faced with a nonfunctional
program, those policyholders who are not required to carry
flood insurance may abandon it. CBO cannot predict when this
might occur, but today the program faces a future with
inadequate resources to pay its obligations.
CBO expects that enacting the Flood Insurance Reform and
Modernization Act of 2006 would improve the financial status of
the NFIP and significantly increase the likelihood that the
program could continue to offer insurance coverage and pay
claims in a timely fashion. By providing funds to pay remaining
claims from the 2005 Gulf Coast hurricanes and forgiving the
debt incurred to pay previous claims from 2005, the bill would
essentially return the NFIP to a financial condition similar to
that which existed before Hurricane Katrina.
Enacting the bill would also strengthen the NFIP's
financial position in the future. It would direct the Federal
Emergency Management Agency (FEMA) to impose rate increases of
up to 15 percent per year on all policyholders so as to
establish a reserve fund for the insurance program. That
reserve fund would be available to pay insurance claims
whenever it was needed. The bill also would require some
policyholders that do not pay the full cost of their insurance
coverage to gradually begin to do so. Finally, it would require
some policyholders to carry a larger deductible amount on their
insurance policies, and it would end the current practice of
offering new policies to some property owners at less than
their expected cost. These requirements would increase the cost
to policyholders and reduce the net cost of the program to the
government. Over the next several years, those changes would
improve the chances that the NFIP would have sufficient funds
to pay future claims.
CBO estimates that enacting the bill would reduce net
outlays of the flood insurance program over the next 10 years
by about $7.6 billion relative to current law. Changes in the
NFIP (mostly higher premiums) and the elimination of its
Treasury debt would reduce the program's net outlays by about
$19 billion over that period. But the appropriation of funds to
pay the remaining claims from the 2005 hurricanes and the
increased availability of funds to pay future claims that could
not be paid under current law would add over $12 billion to the
program's outlays. At the same time, because the bill would
forgive the NFIP's debt to the Treasury, that agency would
forgo interest payments from FEMA of about $9.5 billion over
the 2007-2016 period, CBO estimates. The net impact of the
bill--including its effect on the NFIP and on Treasury's
interest receipts--would be an increase in direct spending of
$1.9 billion over the 2007-2016 period.
As the value of flood insurance coverage in force continues
to grow, the cost of claims that the NFIP may face in the next
decade will also increase. In most years, they will probably
total between $1 billion and $5 billion--similar to the losses
the insurance program experienced in the years before Katrina--
but there could be another catastrophic flood in the next
decade with much larger losses. CBO's estimate assumes that
annual flood insurance claims during this period are equal to
the amounts anticipated by the program's actuaries for a
typical year, but actual claims are likely to vary
substantially from year to year and the total amount of claims
over the next 10 years is quite uncertain. This estimate also
assumes that substantial numbers of policyholders drop flood
insurance coverage or find alternatives to the NFIP as their
premiums rise steadily over the period.
The bill also would increase the amounts authorized to be
appropriated for FEMA's flood mapping program. In addition, the
bill would require FEMA to participate in state-sponsored
claims mediation programs and would direct the Government
Accountability Office (GAO) to conduct multiple studies.
Assuming appropriation of the authorized amounts, CBO estimates
that implementing these provisions would cost $1.5 billion over
the 2007-2011 period and an additional $900 million after 2011.
The bill contains two intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) because it would
direct state regulatory agencies to require, and state lenders
to provide, information on flood risk to more mortgage
borrowers. CBO estimates that the cost for state governments to
comply with those mandates would be small and well below the
annual threshold established by UMRA ($64 million in 2006,
adjusted annually for inflation). The legislation also would
impose private-sector mandates, as defined in UMRA, on certain
mortgage lenders. Based on information from industry and
government sources, CBO expects that the direct costs to comply
with those mandates would fall below the annual threshold for
private-sector mandates established in UMRA ($128 million in
2006, adjusted annually for inflation).
Estimated cost to the Federal Government: The estimated
budgetary impact of the bill is shown in the following table.
The budgetary impact of this legislation falls within budget
function 450 (community and regional development).
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
----------------------------------------------------------------------------------------------------
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
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CHANGES IN DIRECT SPENDINGa
Payment of Remaining 2005 Claims:
Estimated Budget Authority..................... 2,400 0 0 0 0 0 0 0 0 0
Estimated Outlays.............................. 1,825 375 200 0 0 0 0 0 0 0
Reforms to the NFIP:
Estimated Budget Authority..................... 900 600 250 0 0 0 0 0 0 0
Estimated Outlays.............................. 900 600 250 -150 -650 -1,150 -1,775 -2,250 -2,700 -3,125
Forgone Treasury Interest Receipts:
Estimated Budget Authority..................... 875 875 925 975 975 975 975 975 975 975
Estimated Outlays.............................. 875 875 925 975 975 975 975 975 975 975
Total Changes:
Estimated Budget Authority..................... 4,175 1,475 1,175 975 975 975 975 975 975 975
Estimated Outlays.............................. 3,600 1,850 1,375 825 325 -175 -800 -1,275 -1,725 -2150
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Flood Mapping and Studies Estimated Authorization:
Level.......................................... 401 400 400 400 400 400 0 0 0 0
Estimated Outlays.............................. 101 260 340 400 400 400 300 140 60 0
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aIn addition, CBO estimates that revenues would increase by about $1 million a year over the 2007-2016 period.
Basis of estimate: For this estimate, CBO assumes that the
bill will be enacted near the beginning of fiscal year 2007 and
that the authorized amounts will be appropriated for each
fiscal year.
Direct spending and revenues
Over the 2007-2016 period, CBO estimates that enacting the
legislation would reduce net outlays for the flood insurance
program by about $7.6 billion and would increase the Treasury's
net outlays for interest by about $9.5 billion.
Funding for Claims from the 2005 Gulf Coast Hurricanes.
Section 10 would appropriate such sums as are necessary to pay
the remaining claims from the 2005 Gulf Coast hurricanes that
exceed the program's resources. According to FEMA, the total
claims for those hurricanes will be about $23.1 billion. The
NFIP has already been authorized to borrow $20.8 billion for
that purpose. Based on information from FEMA, CBO estimates
that enacting this bill would provide another $2.4 billion for
paying claims from the 2005 hurricanes and that the resulting
outlays would occur over the 2007-2009 period.
Reforms to the NFIP. The bill contains several provisions
that together would govern the magnitude of future rate
increases for flood insurance and reduce the amount of expected
future claims. Those provisions would:
Require the NFIP to create a reserve fund;
Increase the ceiling on average annual rate increases
that can be imposed on policyholders from 10 percent a
year to 15 percent a year;
Forgive the program's current outstanding debt to the
Treasury;
Phase out subsidized premiums for some policyholders;
Raise the deductibles for certain types of
policyholders; and
Prohibit FEMA from issuing new subsidized insurance
policies.
CBO estimates that these changes would reduce net outlays
of the NFIP by about $10 billion over the 2007-2016 period. The
program's net outlays would decline, relative to current law,
because premium increases would be greater and no interest
would have to be paid to the Treasury on the NFIP's current
debt (which would be forgiven). That decline would be partially
offset by higher claims payments because, under the bill, the
NFIP would have sufficient funds to pay average expected
claims; under current law, it would not.
Establish a Reserve Fund and Increase the Limit on Annual
Rate Increases. FEMA would be required to establish a reserve
fund equal to 1 percent of the value of flood insurance
coverage in force in the previous year. By the end of 2006,
FEMA expects that the value of flood insurance coverage in
force will be about $1 trillion; by 2015, the amount of
coverage is likely to reach $1.5 trillion. The bill would
direct FEMA to gradually accumulate the necessary reserves over
10 years.
In addition, section 4 would authorize the NFIP to increase
rates on policies within each risk category by an average of up
to 15 percent per year. Under current law, the limit on rate
increases is 10 percent. CBO expects that FEMA would have to
impose annual 10 percent rate increases on flood insurance
policies under current law in order to pay claims and service
its outstanding debt to the Treasury. Under the bill, however,
CBO expects FEMA would need to increase most rates by 15
percent annually in order to pay claims and accumulate the
required reserves. CBO interprets this legislation as directing
FEMA to implement rate increases to meet the funding targets
for the reserve fund even if those rates exceed the estimated
actuarial cost of providing flood insurance.
For this estimate, we assume that FEMA could begin to
implement premium increases to establish a reserve fund
starting in May 2007, and that it would take one year before
any increase was fully implemented because individual flood
insurance policies are renewed throughout the year. Starting in
May 2007, the bill would direct FEMA to collect 10 percent of
the reserve fund requirement (or about $1 billion) in 2007.
That directive would imply a very large rate increase; however,
under the bill, the increase would be capped at 15 percent. If
claims over the next several years occur at the actuarial
average, a significant portion of the increased premium
collections would be needed to pay flood claims and would not
be available to accumulate in a reserve fund for at least a few
years.
For this cost estimate, CBO assumes that FEMA would impose
15 percent rate increases on its policyholders each year over
the 2007-2016 period in an attempt to reach the reserve amounts
specified in the bill, but that it probably would fall short of
that target in this period. CBO estimates that flood insurance
coverage in force would grow from about $1 trillion today to
around $1.5 trillion by 2015. It is unlikely that FEMA would be
able to collect enough premiums above amounts it pays for
claims over the next 10 years to fully capitalize a reserve
fund equivalent to 1 percent of insurance coverage in force.
CBO estimates that, with all of the program changes authorized
by the bill, the NFIP would have a reserve fund with a balance
of about $10 billion in 2016, less than the estimated target of
about $15 billion for that year. (If losses due to floods are
less than average over that period, the balance would be
greater. If losses exceed the average, the balance would be
smaller. Based on FEMA's actuarial review of the NFIP, CBO
estimates the expected loss is about $3.5 billion for policies
in force in 2006.) To estimate the amounts that could be
collected in response to the bill's reserve fund requirement,
CBO reduced the projected amount of flood insurance coverage to
reflect thelikelihood that some policyholders would drop NFIP
coverage or find alternatives to that coverage after successive years
of 15 percent annual rate increases ultimately quadrupled their
insurance premiums. Policyholders that live in lower-risk areas that
are paying actuarially fair insurance premiums today might seek and
find alternative insurance products in the future if their cost to
participate in the NFIP far exceeded their actuarial risk.
Alternatively, some policyholders in this situation might choose to
reduce their flood coverage or drop it altogether. Such resources would
reduce the total coverage in force and hence the required size of the
reserve fund.
Increase Rates for Pre-FIRM Properties. Section 4 would
authorize the NFIP to gradually increase premiums on certain
properties that were built before flood insurance rate maps
(FIRMs) were completed or before 1975, whichever is later--
known collectively as pre-FIRM properties. The affected pre-
FIRM properties include:
Properties that have been flooded four or more times
with the total claims payments exceeding $20,000; or
properties with two or more claims exceeding the fair
market value of the property;
Nonresidential structures;
Nonprimary residences (such as vacation homes);
Properties that sustain damage exceeding 50 percent
of the fair market value of the property after
enactment of the bill; and
Properties that undergo improvements or renovations
exceeding 30 percent of the fair market value of the
property after enactment of the bill.
Under current law and policies, many pre-FIRM structures
are charged a flood insurance premium that is less than the
full actuarial cost of the insurance. Thus, such policies are
considered to be subsidized by the program. The bill would
authorize FEMA to increase rates on those specified types of
pre-FIRM properties (but not other types of pre-FIRM
properties) by 25 percent a year until the actuarial rate is
achieved. At that rate, CBO expects that many, but not all, of
these pre-FIRM properties would start paying actuarial rates
within the next 10 years.
According to FEMA, approximately 455,000 pre-FIRM
properties would be affected by the bill, and the average
premium for those properties is about $800 a year. CBO expects
that owners of some of those properties would either drop flood
insurance coverage or reduce their level of coverage in
response to an increase in premium charges.
Raise Deductible for Pre-FIRM Properties. Section 12 would
increase the deductible for pre-FIRM properties from $1,000 to
$2,000 for both the structure and its contents. For pre-FIRM
properties, which do not pay actuarial rates for their
insurance, the increase in the deductible would not affect the
price of the insurance, but it would decrease the amount of
claims payments made for such properties. Based on information
from FEMA, CBO estimates that claims payments would decrease by
about 7.5 percent if this higher deductible were implemented.
Bar New Subsidized Policies for Pre-FIRM Properties.
Section 4 would prohibit FEMA from offering new subsidized
insurance policies. CBO estimates that this provision would
reduce spending by a negligible amount over the next 10 years
because we expect few new properties eligible for pre-FIRM
rates to be added to the flood insurance program.
Forgone Treasury Interest Payments. Section 11 would
relieve the NFIP of its obligation to repay funds borrowed to
pay claims from the 2005 Gulf Coast hurricanes. Current law
requires FEMA to repay any borrowed funds (with interest) as it
collects premiums. In the absence of legislation to relieve
FEMA of it obligation to repay debt, FEMA would need to use a
portion of its premium income to pay debt-service costs to the
Treasury. Under this bill, such payments would not be
necessary, and income that the NFIP would otherwise use to
service its debt would instead be used to pay policyholders'
claims and accumulate reserves.
Interest payments from the NFIP to the Treasury are
intragovernmental transactions; they are recorded in the budget
as outlays for FEMA and as offsetting receipts (that is,
negative outlays) for the Treasury. Eliminating those payments
would reduce FEMA's outlays (making more funds available to pay
claims and accumulate reserves)--but it also would increase the
Treasury Department's net outlays by $0.9 billion to $1.0
billion per year because it would be receiving less interest
income.
Additional Claims Payments Under the Bill. CBO expects that
enacting this legislation would enable the flood insurance
program to continue to grow in size and to pay claims that it
would be unable to pay in a timely fashion under current law.
That would be possible because the legislation would
appropriate $2.4 billion needed to pay remaining NFIP claims
from 2005, increase premiums and deductibles, and eliminate the
program's debt to the Treasury. Over the 2007-2016 period, CBO
estimates that NFIP would pay over $12 billion for current and
future claims that probably could not be compensated under
current law. That estimate assumes that flood insurance claims
would be equivalent to the expected annual cost of the program
as estimated by FEMA's actuaries--over $3.5 billion today. In
future years, those expected losses will increase with
inflation and change as the number of policies in force varies.
Other NFIP Modifications. The bill would make certain
changes to the NFIP that might increase the number of policies
in the program and result in the program collecting more
premium income than it currently does. CBO has no information
to estimate the number of policies that could be added to the
program from enacting these sections.
Mandatory Coverage Areas. Section 5 would require that
homes located behind levees, dams, and other man-made
structures become part of special flood hazard areas, which are
areas at high risk for flooding. The bill would require
property owners to purchase flood insurance once the NFIP
updates its flood maps to include those new high-risk areas.
CBO assumes that the additional policies generated by this new
mandatory purchase requirement would be pricedinitially at
actuarial rates. CBO has no basis for estimating the number of policies
that might be sold under this provision.
Nonmandatory Participation for the 500-year Flood plain.
Section 19 would require the NFIP and regulated lending
institutions to notify communities if they are entirely or
partially located within the 500-year flood plain. Properties
within the 500-year flood plain would not be subject to
mandatory purchase requirements but could voluntarily purchase
flood insurance, which CBO assumes would initially be priced at
actuarial rates. As the cost of those policies increased far
above actuarial rates to capitalize the proposed reserve fund,
CBO expects few of these property owners would elect to buy
flood insurance.
Civil Penalties. Section 8 would increase the civil penalty
from $350 to $2,000 for lenders that do not enforce the
mandatory purchase requirement. CBO estimates that the
increased revenue from the civil penalties established under
this bill would amount to about $1 million a year.
Spending subject to appropriation
The bill also would authorize additional discretionary
spending. Assuming appropriation of the authorized amounts, CBO
estimates that such spending would total about $1.5 billion
over the 2007-2011 period and an additional $900 million after
that period.
Flood Mapping Program. Section 17 would authorize the
appropriation of $400 million a year over the 2007-2012 period
for updating flood maps to include the 500-year flood plain and
areas that would be flooded if a dam or levee failed. In
addition, the bill would reestablish the Technical Mapping
Advisory Council to assist with managing flood mapping
activities. Based on historical spending rates for this
program, CBO estimates that implementing this section would
cost $1.5 billion over the 2007-2011 period and an additional
$900 million in subsequent years.
Participation in Claims Mediation. Section 22 would require
FEMA to participate in state-sponsored claims mediation
programs to help expedite the settlement of disputed flood
insurance claims. The additional administrative costs of this
provision are uncertain because FEMA does not know how it would
implement this provision. If staffing increases were
significant, however, it is likely that the NFIP would raise
the administrative fees assessed on policyholders and that
added income from those fees would offset any increase in
costs.
Studies. Section 24 would direct GAO to conduct four
studies on various aspects of the NFIP as well as an audit of
the program's spending related to the 2005 Gulf Coast
hurricanes. CBO estimates that conducting those studies would
cost about $1 million over the 2007-2011 period.
Impact on State, Local, and tribal Governments: The bill
contains two intergovernmental mandates as defined in UMRA. It
would require state agencies that regulate mortgage lenders to
require that those lenders provide borrowers with information
about flood insurance if the property covered by the mortgage
is located in the 500-year flood plain. It also would require
state agencies that offer direct mortgages to provide such
information. Based on information from mortgage lenders, state
regulatory agencies, and state housing authorities, CBO
estimates that the cost for state regulatory agencies would be
minimal and the number of loans for which state agencies would
be required to provide flood information would be small. The
total cost for state agencies to comply with those requirements
would be well below the annual threshold established in UMRA
($64 million in 2006, adjusted annually for inflation).
Impact on the Private Sector: The legislation would impose
private-sector mandates, as defined in UMRA, on certain
mortgage lenders. Based on information from industry and
government sources, CBO expects that the direct costs to comply
with those mandates would fall below the annual threshold for
private-sector mandates established in UMRA ($128 million in
2006, adjusted annually for inflation).
The bill would require mortgage lenders--when making,
increasing, extending, or renewing any loan secured by property
located in an area within the 500-year flood plain--to notify
the purchaser or lessee and the servicer of the loan that such
property is located in the 500-year flood plain. The bill also
would require certain mortgage lenders to notify policyholders
that insurance coverage may cease with the final mortgage
payment and to provide direction as to how the homeowner could
continue flood insurance coverage after the life of the loan.
In addition, certain mortgage lenders would be required to
deposit premiums and fees for flood insurance in an escrow
account on behalf of the borrower. According to industry
representatives, the cost for mortgage lenders to provide the
additional notices and direction and to escrow flood insurance
payments would be small. Therefore, CBO estimates that the
aggregate direct cost of complying with the mandates would fall
below the annual threshold.
Previous CBO Estimate: On April 4, 2006, CBO transmitted an
estimate for H.R. 4973, the Flood Insurance Reform and
Modernization Act of 2006, as ordered reported by the House
Committee on Financial Services on March 16, 2006.
H.R. 4973 contains a number of provisions similar to those
in this bill, such as increasing rates on certain pre-FIRM
properties, increasing the annual limit on rate increases, and
providing funds to pay the remaining claims from the 2005 Gulf
Coast hurricanes. H.R. 4973 would not, however, forgive the
NFIP's debt to the Treasury, and CBO estimated that all of the
additionalpremium income under the bill would have to be used
to pay claims. The cost estimates reflect those differences between the
bills.
Estimate prepared by: Federal Costs: Julie Middleton and
Perry Beider; Impact on State, Local, and Tribal Governments:
Melissa Merrell; Impact on the Private Sector: Paige Paper/
Bach.
Estimate approved by: Robert A. Sunshine, Assistant
Director for Budget Analysis.
Regulatory Impact Statement
In accordance with paragraph 11(b), rule XXVI, of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill.
This legislation seeks to address several gaps in coverage
areas within the National Flood Insurance Program. Section 7 of
this legislation requires states, as a requirement of
participation in the program, to require state-chartered
financial institutions to maintain flood insurance on all
current and future mortgages starting December 31, 2008. This
section will enhance safety and soundness of state chartered
financial institutions by ensuring that assets used to secure
loan payments are sufficiently covered in the event that assets
are damaged or destroyed by a flooding event. Section 8 updates
the maximum allowable civil money penalties per violation that
regulators may impose against financial institutions for
failing to comply with the provisions of this Act. Section 8
also eliminates the $100,000 annual cap that regulators may
impose on financial institutions to ensure compliance with this
Act. Section 9 of this Act requires that all flood insurance
payments are escrowed, which insures that flood insurance
payments remain current and that assets used to secure loan
payments are protected.
This legislation also requires the NFIP to keep and
maintain a reserve fund of one percent of total risk exposure.
This provision ensures that policyholders' claims will be paid
without the assistance of the U.S Treasury and is also
consistent with the goal of working to eliminate some of the
$1.3 billion annual subsidy for the program.
It is expected that the reported bill will have no impact
on the personal privacy of the current or prospective flood
insurance policyholders. This bill is expected to strengthen
the financial status of the NFIP by making rates more
actuarially sound. This bill also provides for more equitable
treatment between policyholders as well as protecting the U.S.
taxpayer from further loss.
Changes in Existing Law (Cordon Rule)
On May 25, 2006, the Committee unanimously approved a
motion by Senator Shelby to waive the Cordon rule. Thus, in the
opinion of the Committee, it is necessary to dispense with
section 12 of rule XXVI of the Standing Rules of the Senate in
order to expedite the business of the Senate.
ADDITIONAL VIEWS OF SENATOR JIM BUNNING
I am pleased that the Committee has included many necessary
reforms to shore up the financial shortcomings of the National
Flood Insurance Program (NFIP) in this legislation. However, I
still have serious concerns about both the financial soundness
and the administration of the NFIP.
The NFIP was created in 1968 to make certain a minimum
level of insurance against losses from flooding was available
to property owners. But the program was not created actuarially
sound. Because Congress made purchase of policies mandatory for
some property owners, premium rates were subsidized by the
taxpayers for properties in existence before the purchase
requirement. Because the government bears the risk of loss and
does not have to make a profit, the program is implicitly
subsidized by the taxpayers. And because premiums are based on
broad zone classifications and badly outdated maps,
policyholders are not even charged actuarial rates on newly
constructed structures.
After nearly 40 years, the subsidies and fiscal unsoundness
remain. Financially, that makes no sense. The explicitly
subsidized properties present a greater risk of loss because
they often do not meet modern building standards. The flawed
premium calculation methodology also prevents charging
policyholders for the risks they pose to the taxpayers.
The original design of the NFIP has also produced several
perverse--and dangerous--incentives. First, because there is no
incentive to fortify old structures, the program encourages
policyholders not to make their structures safer. Second,
because premiums are not based on risk and are implicitly
subsidized, the program encourages building in high-risk areas.
Third, because vacation homes and other properties can be
insured and subsidized, the program provides extra benefits to
the least needy. Fourth, the mere existence of not-for-profit
insurance backed by the taxpayers prevents private insurers
from even trying to offer competing products.
This legislation builds upon the reforms enacted in 2004.
It eliminates the subsidies for the properties least deserving
of taxpayer handouts. It allows larger annual premium
adjustments to increase premium income to the program. More at-
risk structures are required to purchase insurance policies,
and the current mandatory purchase requirements will be better
enforced. Future catastrophic losses will be offset by the
creation of a reserve fund and an improved formula for
calculating annual premium rates. Finally, numerous
administrative changes, including more detailed mapping, will
help the program better cope with future losses.
Unfortunately, these reforms come at a high price--well
over $20 billion. But even more reforms are needed to make the
program financially sound. There has been opposition to
significant reforms in the NFIP since day one, but the
taxpayers deserve better and this Committee must continue to
implement needed changes. The current authorization expires at
the end of 2007, and I hope that the lessons and losses of the
past will encourage more significant reforms in the
reauthorization.
While I believe this legislation addresses some significant
problems in the design of the NFIP, there are also problems not
of Congress's creation. The administration of the program by
the Federal Emergency Management Agency (FEMA) has, at times,
been in defiance of the clear intent of Congress. Had the
Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004
not been enacted, victims of the 2004 and 2005 hurricane
seasons would have had no insurance coverage for flood damage.
Yet FEMA has still not fully implemented that law. Provisions
of that Act establishing education and training requirements
for insurance agents and a pilot program for mitigation of
severe repetitive-loss properties must continue to be improved.
Most inexcusably, the appeals process established in that
Act has yet to be implemented. FEMA did not even propose a rule
until 23 months after the Act was signed into law and 17 months
after the statutory deadline passed. And the rule proposed by
FEMA was wholly inadequate and provided no protections for
policyholders. I have received a written promise from the
Secretary of Homeland Security that changes to provide due
process for appellants will be made when the rule becomes
final. Those changes will include setting a 90-day deadline for
FEMA to resolve appeals, establishing a point of contact within
FEMA for a claimant to get assistance with filing an appeal,
and requiring FEMA to provide an explanation of why the claim
was denied and what information is necessary to file the
appeal.
Looking to the upcoming reauthorization, this Committee
must again make significant reforms to financially fortify the
NFIP. If FEMA continues to defy Congress's intent in the 2004
Act, or in this legislation, there must be serious
consequences. We owe it to the policyholders to ensure the
program works, and we owe it to the taxpayers to ensure they do
not have to foot the bill for another catastrophic loss.
Jim Bunning.
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