Some in Congress Want to Undo Important Flood Insurance Reforms

Some in Congress Want to Undo Important Flood Insurance Reforms
October 1, 2013

Matthew Glans

Matthew Glans (mglans@heartland.org) joined the staff of The Heartland Institute in November 2007... (read full bio)

Despite the success of recent reforms to the National Flood Insurance Program, some federal legislators are considering extending flood insurance subsidies to address complaints from homeowners in high-risk areas.

In response, a group of nine free market, conservationist and taxpayer protection groups – including R Street Institute, Americans for Prosperity, American Consumer Institute, ConservAmerica, Freedom Works, Less Government, National Taxpayers Union, Taxpayers for Common Sense, and Taxpayers Protection Alliance – have sent a letter to Congress, arguing that extending these subsidies undermines the reforms and allows the federal flood insurance program to continue to pose a significant liability on taxpayers.

In August the Union of Concerned Scientists estimated the program is at least $30 billion in debt if the costs of damages from last year’s Hurricane Sandy are taken into account. Before then the government estimated the program was $18 billion in debt.

‘Necessary to Improve Program’

The group letter noted, “Last year’s overhaul of the National Flood Insurance Program, the Biggert-Waters Flood Insurance Reform Act of 2012, included important changes to the program’s structure to reduce costs to taxpayers and risks to homeowners. The crux of that reform, a phase-out of subsidies to transition more participants to risk-based rates, was a necessary improvement to a troubled program in massive debt to taxpayers. Efforts to delay these changes must be resisted.”

The reforms were based on a fundamental principle of insurance, that high risks should be charged higher premiums than low risks. Rather than encouraging risk-based, environmentally sensitive land planning and reducing flood risk, the NFIP has subsidized construction in high-risk areas and thus contributed to the destruction of environmentally important wetlands. To make matters worse, the NFIP has no practical way to pay back the billions of dollars it owes.

Rates Based on Risks

The Biggert-Waters Flood Insurance Reform Act of 2012 is the first real positive NFIP reform package in decades. The reforms are designed to reduce costs for taxpayers and move NFIP policyholders toward policies with rates based on real-world risks, not politics.

The letter also addresses many other problems with the NFIP as it is currently constructed. It points out that many of the properties receiving the subsidies are in affluent areas or areas posing significant flood risks.

Program Subsidizes the Wealthy

A chief complaint against the NFIP is that middle- and lower-income people often end up subsidizing wealthy property owners. The letter notes, “29 percent of the properties located where NFIP operates are in counties with the highest 10 percent of income, and 43 percent of subsidized properties are in counties in the top 10 percent of all home values. Extending subsidies to these homes for an additional year is simply not justifiable.”

Increases in flood insurance rates due to new NFIP flood maps are another hot point issue. Homeowners facing significant hikes in their insurance premiums have been pressuring officials to delay or stop the increases altogether. The letter to Congress points out that the areas facing significant increases in insurance rates, which result in higher premiums, are those that present heightened flood risks. The higher premiums are a reflection of the high risks. And the letter notes only a small number of properties are seeing sharply higher insurance rates.

“Finally, the recently released flood maps from the Federal Emergency Management Agency cast doubt on some of the wilder claims of massive rate increases. The universe of homes facing large hikes is very small and consists mostly of areas with extraordinary risk resulting in a total loss roughly once every ten years, properties for which mitigation or buyouts might be appropriate,” the letter states.

Rolls Back Effective Reform

The letter concludes that extending the flood insurance subsidies would gut the best reforms of Biggert-Waters while placing a greater burden on taxpayers.

“Passage of Biggert-Waters last year was a step in the right direction of a freer flood insurance market that is not built on payouts from taxpayers. Gutting that reform by eliminating its central component of phased-out subsidies for one year would undo that progress and put taxpayers on the hook for billions more in NFIP costs.”

Matthew Glans

Matthew Glans (mglans@heartland.org) joined the staff of The Heartland Institute in November 2007... (read full bio)