With the June 1 start of the Atlantic Hurricane Season just weeks away, Congress still has yet to address any of the problems with a federal program we are sure to hear more about if we have another big storm year: the broken and unsustainable National Flood Insurance Program.
For 50 years, the NFIP has been the nation’s primary source of insurance coverage for floods. It is also a textbook example of big government plans gone awry, chock full of subsidies that flow disproportionately to big real estate developers. The Congressional Budget Office finds that 85 percent of coastal NFIP properties pay less than the full risk-based rate of coverage, accounting for most of the program’s projected annual shortfall of $1.4 billion.
The NFIP headed into the 2017 season $24.6 billion in debt to taxpayers, with most of that sum still on the books from Hurricane Katrina in 2005 and Superstorm Sandy in 2012. Last year’s hurricanes Harvey, Irma and Maria have contributed another $9 billion in claims thus far. Yet despite those mounting losses, Congress moved to forgive roughly half the NFIP’s debt without requiring any reforms to a program that the Government Accountability Office has targeted as “high risk” every year since 2006.
The time to do so may be running short. The NFIP’s statutory authorization was scheduled to expire last September, but Congress has pushed off the deadline repeatedly through temporary extensions, with the current iteration scheduled to expire July 31. Given how close the 2018 midterms are, unless the Senate moves quickly to pass a comprehensive reauthorization bill, the program likely will be punted into 2018 without any changes.
That should make conservatives very nervous. In the House, Financial Services Committee Chairman Jeb Hensarling, R-Texas, worked furiously last fall to pass the 21st Century Flood Reform Act by a 237-189 margin. The House bill makes real conservative reforms, such as phasing out subsidies to repetitive loss properties, which account for just 2 percent of NFIP policies but nearly a quarter of its claims. Alas, Hensarling is retiring at the end of this term, and it’s not at all clear what the balance of power will look like in the 116th Congress.
That’s why it’s crucial that Sen. Patrick J. Toomey stands up to make sure the Senate acts to pass the kinds of reforms recommended by President Donald Trump earlier this year in the White House’s Fiscal Year 2019 budget. Under the White House proposal, the Federal Emergency Management Agency could discontinue coverage for extreme repetitive loss properties that suffer future losses. The Trump plan also would phase out coverage for commercial properties and bar coverage for new construction in flood-prone regions. It’s simply common sense not to give taxpayer-funded incentives to build in areas we already know are going to flood.
Instead, Congress should do what it can to encourage the fast-growing market of private flood insurance. According to research by the R Street Institute, the private market grew by more than 50 percent in 2017 and now represents nearly 15 percent of all flood insurance written nationwide. The House-passed bill would make it easier for banks and other lenders to accept privately written coverage for mortgages that are required to have it, and a similar proposal has bipartisan support in the Senate.
Not only would a larger private flood insurance market take the risk off the backs of taxpayers, but it also would give homeowners more options. A study released last year by the actuarial firm Milliman found that, even in flood-prone states like Florida, Texas and Louisiana, between 70 percent and 90 percent of policyholders could find cheaper coverage in the private market than from the NFIP. What’s more, should any policyholders have trouble getting their claims paid, their state insurance commissioner would have the power to intervene. That’s not easy for state officials to do when the federal government is the insurance company.
The private market isn’t big enough yet to take on all of the NFIP’s 5 million policies, which is why Congress can’t just let the program lapse. The National Association of Realtors estimates a lapse would cause roughly 40,000 lost or interrupted home sales every month. But nor can we ignore the problems that already have forced taxpayers to just eat $16 billion of the NFIP’s debt. There are sensible conservative reforms that would move the NFIP in a more market-friendly direction and it is crucial that the Senate get working on passing those proposals right away.
R.J. Lehmann is director of finance, insurance and trade policy at the R Street Institute, a free-market think tank in Washington, D.C.