LEGISLATIVE BULLETIN | May 6, 2008

S. 2284, the Flood Insurance Reform and Modernization Act of 2007

Congress established the National Flood Insurance Program (NFIP) in 1968 after finding that floods have "created personal hardships and economic distress which have required unforeseen disaster relief measures and have placed an increasing burden on the Nation's resources."Congress wanted to create "a reasonable method of sharing the risk of flood losses through a program of flood insurance which can complement and encourage preventive and protective measures."(P.L. 90-448) Administered by the Federal Emergency Management Agency (FEMA), NFIP provides 1) insurance that serves as an alternative to federal disaster assistance for individuals living in flood-prone areas; 2) mapping to identify areas subject to flooding; and 3) mitigation to reduce future flood-related losses through community floodplain management measures. 

Hurricanes Katrina, Rita, and Wilma caused 1,700 deaths, families and businesses and catastrophic property losses associated with massive flooding. The devastation of the 2005 hurricane season exposed millions of Americans to the consequences of the lack of affordable insurance, revealed the inadequacy of the NFIP to handle a catastrophe of this magnitude, and left the program with staggering debt. Congressional Democrats, led in the Senate by Senator Dodd, have responded with legislation that would implement severalkey reforms to ensure that NFIP can continue to operate, is self-sustaining, and adequately identifies areas at risk of flood loss. 

If enacted, the Flood Insurance Reform and Modernization Act of 2007, would ensure sufficient funds for NFIP, expand and encourage the purchase of flood insurance, establish financial soundness; modernize the flood mapping program; protect policyholders and taxpayers; reform the procedures associated with the reimbursement of insurance companies, and mandate studies. 

The Senate is expected to consider S. 2284 during the week of May 5, 2008. 

This Legislative Bulletin provides a description of major provisions, anticipated amendments, legislative history, the Statement of Administration Policy, and links to related readingresources.

 

Major Provisions 

Ensure Sufficient Funds for the National Flood Insurance Program 

The NFIP has grown significantly over its history from one million policyholders and $50 billion of risk exposure to over 5.4 million policyholders with in excess of $1 trillion of risk exposure. While the program has been largely self-sustaining, the catastrophic nature of the 2005 hurricane season, coupled with the flood losses of 2004, showed weaknesses in the program and left FEMA with almost $20 billion in debt to the U.S. Treasury. In the years between the program's inception and 2005, taxpayers paid out one billion dollars for flood claims, with the large majority of claims being paid through premium income. 

Claims payments resulting from the 2005 hurricanes, however, exceed the cumulative claims payments made to policyholders since the program began. Due to the structure and the current financial situation of NFIP, the program is not in a position to meet the claims of policyholders, nor is it in a position to pay back the debt incurred from the 2005 claims. 

FEMA has indicated that it will be unable to repay the debt currently owed to the U.S. Treasury. (this claim has been substantiated by the Congressional Budget Office and the Government Accountability Office) Interest alone on this debt is approximately $900 million annually, almost 40 percent of annual premium income. To ensure the continuation of NFIP as well as the long-term financial solvency of the program, this bill forgives the $17 billion in debt owed by FEMA, and makes a number of changes designed to increase the ability of the program to pay claims in the future.

 

Specifically, S. 2284 would: 

•Forgive FEMA's debt; 

•Require FEMA to establish a reserve fund of one percent of all insurance in force, built up over time; and 

•Reauthorize the National Flood Insurance Program (NFIP) through 2013.

 

Expand and Encourage the Purchase of Flood Insurance 

Participation in the NFIP is not as robust as Congress anticipated. Since 1973, participation in NFIP is required for properties in the 100-year flood plain with federally-regulated mortgages, enforced through federal banking regulations. Many property owners without federally-backed mortgages and those with no outstanding mortgage, however, have chosen not to participate in the program. In fact, according to recent studies conducted by the American Institutes for Research, less than 50 percent of single-family homes in special flood hazard areas, and only 75-80 percent of property owners required to purchase flood insurance, actually do so. Notwithstanding the decision of many owners not to participate, all of the structures within the 100-year floodplain are exposed to heightened risk. 

While only one percent of homes outside mandatory purchase areas have flood coverage through NFIP, 25 percent of flood claims are outside of the 100-year floodplain. This indicates that areas of residual risk, outside the 100-year floodplain, are also at risk of flooding. Structures in "residual risk areas," those protected by man-made structures such as dams or levees, are not required to purchase flood insurance. While the risk of flooding for these properties remains low, a flooding event caused by a breached dam or levee, in a residual risk area, is likely to be widespread and cause significant flood damage. 

Under this bill, additional property owners will be required to purchase flood insurance, and those in the 500-year flood plain will be told of their flood risks, increasing the likelihood that they will voluntarily purchase flood coverage. Specifically, S. 2284 would require: 

•Properties in "residual risk areas" - those protected by dams or levees - to purchase flood insurance once the mapping of essential areas is complete; 

•States to ensure that state-regulated lending institutions comply with the mandatory purchase requirements; 

•Lenders to escrow all flood insurance premiums; 

•Accurate mapping of the 500-year floodplain and require notification to properties located within the 500-year floodplain; and 

•Notification (under Real Estate Settlement Procedures Act) of the availability of flood insurance. 

The legislation would also increase lender penalties from $350 to $2000 per violation and eliminates the annual cap on lender penalties;

 

Establish Financial Soundness 

When NFIPwas initially established, Congress decided that it would not be fair to require owners of properties that were built prior to the inception of the program and the completion of the flood insurance rate maps (pre-FIRM properties) to pay actuarial rates. Because those structures were built prior to rate maps and the flood program, the premiums on those properties would have been prohibitively expensive. In addition, Congress believed that these properties would be destroyed, rebuilt, or mitigated, but in practice, the phase-out of these properties has been slow. And because those properties do not pay actuarial rates, the flood program has been left with fewer funds than needed to pay for losses in higher-than-average loss years. In addition, to address the most at-risk properties, in 2004, Congress established a severe repetitive loss pilot program to mitigate those properties that experienced multiple flood losses that are a drain on NFIP. 

S. 2284 would require FEMA to review rates and use actuarial principles in setting rates in NFIP. FEMA would also be required to review and conduct rulemaking on insurance company reimbursement so that reimbursements and actual administrative expenses are aligned. Specifically, the legislation would: 

•Require certain properties to pay actuarial rates (phased in at 25 percent rate increase a year), including non-primary residences; severe repetitive loss properties; commercial properties; properties damaged over 50 percent of the home's value; and properties improved by over 30 percent of the home's value; 

•Require any new flood insurance policy to be actuarially sound and require FEMA to adjust rates to accurately reflect risk upon revision of flood insurance rate maps; 

•Increase the allowable annual rate increase from 10 to 15 percent and increase minimum deductibles; and 

•Extend the Severe Repetitive Loss Mitigation program through 2013 to mitigate losses on the most at-risk properties, those that are a financial drain on NFIP due to repetitive losses.

 

Modernize the Flood Mapping Program 

Flood maps, a critical component of the program, are out of date and in many cases, inaccurate. A large majority of flood maps are over a decade old, leaving communities and their residents without an accurate assessment of flood risks. According to FEMA, "because flood hazards are dynamic and usually increase over time as development occurs, old maps tend to understate actual existing flood hazards. Additionally, most of the maps were produced using now antiquated manual cartographic techniques." (NFIP--Program Description, August 1, 2002) FEMA has identified lack of funding as the primary reason that flood maps are out of date. 

This legislation would establish a map modernization program so that maps are updated, accurate, and readily available. The Technical Mapping Advisory Council would be re-established to ensure that FEMA adopts meaningful standards for mapping that are consistent and based on the most accurate data and information. 

S. 2284 would: 

•Authorize appropriations of $400 million per year for map modernization; 

•Re-establish the Technical Mapping Advisory Council and establish standards for mapping, including requirements that all maps be updated using the most accurate data and that all maps be digitized; and 

•Eliminate the cap on state contribution towards mapping efforts, currently set at 50 percent, so that states can modernize their maps more thoroughly.

 

Protect Policyholders and Taxpayers 

Homeowners have protested what they view as inappropriate obstacles to the payment of their property damage insurance claims in the aftermath of the 2005 hurricane season. Increasingly, these policyholders have been resorting to litigation to resolve the delays and economic uncertainty. To enhance policyholder and taxpayer protection, S. 2284 would: 

•Require FEMA to participate in state-sponsored, non-binding mediation where there are multiple insurance claims on the same property (when there are disagreements about wind versus flood damage); 

•Reiterate FEMA's responsibilities under the 2004 Reform Actto establish minimum education and training requirements for insurance agents and require FEMA to submit a report on its progress within three months; and 

•Require FEMA to collect information on flood and wind losses, specifically where an insurance company writes both policies on a single property, so that FEMA can evaluate the accuracy of flood payments.

 

Reform Reimbursement Policies 

In 1983, in an effort to increase effectiveness and participation in the program, NFIP formed a public-private partnership with private insurance companies. Under this partnership, private insurance companies, known as Write Your Own (WYO) companies, handle the sale and administration of flood insurance policies. Over 90 percent of flood policies are sold through WYO companies, though the federal government underwrites the policies. Eighty-eight private insurance companies participate in the WYO program, and they are paid an administrative fee of over 30 percent of all premiums collected, as well as 3.3 percent of any claims paid and additional fees for adjusting claims and writing additional policies. The formula for devising the fees paid to WYO companies is based on the administrative costs in other insurance lines, not on actual costs of administering this program. 

S. 2284 would: 

•Require WYO companies, those that sell flood insurance, to submit the last five years of audit data to FEMA and GAO; and 

•Require FEMA to conduct rulemaking on how to best collect consistent and accurate expense data from insurance companies and to conduct rulemaking on reimbursement of insurance companies that tracks, as closely as possible, the actual expenses of such companies in administering the program.

 

Require Studies 

S. 2284 would: 

•Require a GAO report on the impact of expanding coverage, both increasing the cap on coverage and expanding coverage to include business interruption and alternative living coverage; 

•Require FEMA to submit an annual report on the financial condition of the flood insurance program; 

•Require GAO to report (within a year) on the composition of the remaining pre-FIRM structures, the number and value of the structures, the income levels of the owners, and the most efficient way to eliminate subsidies; and 

•Require GAO to conduct a review of the three largest contractors FEMA uses to administer the flood insurance program.

 

Legislative History 

The Senate Committee on Banking, Housing, and Urban Affairs heard testimony in the on October 2, 2007 regarding proposals to reform NFIP. On November 1, 2007, the Committee considered a Committee Print of the Flood Insurance Reform and Modernization Act of 2007 and voted unanimously to report the bill to the Senate. The bill was introduced by Senator Dodd (S. 2284) and placed on the Senate Legislative calendar under General Orders (Calendar No. 460). On May 2, 2008, Majority Leader Reid filed cloture on the motion to proceed to S. 2284. 

The House Clerk's office has identified H.R. 3121, the Flood Insurance Reform and Modernization Act of 2007, as related to S. 2284. H.R. 3121 was agreed to in the House on September 27, 2007 and subsequently referred to the Senate Committee on Banking, Housing, and Urban Affairs. A Congressional Research Service analysis comparing H.R. 3121 and S. 2284 is available here.

 

Possible Amendments 

The DPC will distribute information on amendments as it becomes available.�

 

Statement of Administration Policy 

At the time of publication, the Administration had not released a Statement of Administration Position (SAP) on S. 2284. The SAP forH.R. 3121 can be accessed here.

 

Related Reading 

Congressional Budget Office, Cost Estimate (October 31, 2007), available here. 

CRS, The Flood Insurance Reform and Modernization Act of 2007: A Summary of Key Provisions (January 30, 2008), available here. 

CRS, Hurricanes and Disaster Risk Financing Through Insurance: Challenges and Policy Options (January 31, 2008), available here. 

CRS, National Flood Insurance Program: Treasury Borrowing in the Aftermath of Hurricane Katrina (January 30, 2008), available here. 

CRS, Post-Katrina Insurance Issues Surrounding Water Damage Exclusions in Homeowners' Insurance Policies (January 30, 2008), available here.

CRS, Side-by-Side Comparison of Flood Insurance Reform Legislation in the 110th Congress (March 27, 2008), available here. 

CRS, Flood Map Modernization Funding (May 1, 2008), available here. 

DPC