National Flood Insurance Program Working on Affordability
National Flood Insurance Program customers who want to pay on an installment basis will have a while to wait because the agency will have to go through a notice-and-comment process before creating them.
Moreover, the Federal Emergency Management Agency has started work on studies about program affordability, privatization and reinsurance, three of the 16 studies it is mandated to undertake under the July 2012 legislation intended to provide long-term certainty for the NFIP.
“Those are the studies we think are priorities,” said Edward Connor, deputy associate administrator for the Federal Insurance and Mitigation Administration, the FEMA sub-agency that manages the NFIP.
Connor discussed the installment plan and studies issues on Friday as part of a wide-ranging briefing on the Biggert-Waters Act, the law that extended the program for five years.
During the conference call, Connor cautioned that new actuarial rates mandated by the program will not pay off its debt, which increased 50%, to $30.4 billion, as a result of action Jan. 8 by Congress, just six months after the law was enacted.
Connor estimated that only 1.1 million of the 5.5 million homes in the program will be affected by the phase-out of subsidized rates over four years mandated by the new law.
Connor cautioned that the new rates will not provide enough money to pay off the program’s debt, but it will provide greater stability to the program.
Indeed, it remains unclear how much new revenue will be created by the new limits on subsidized rates; “how that works out remains unclear,” he said.
The debt limit was raised in order to pay the cost of settling claims resulting from Superstorm Sandy after it hit the Northeast in late October.
The primary purpose of the conference call was to brief the press on the rate hikes imposed by the law.
This includes a mandate to eliminate subsidies on second homes and rental properties through a four-year phase-in process. The new law also mandated phase-in of full rates for properties that have suffered multiple losses, Connor said.
Connor also said that people on subsidized rates who drop out of the program because they don’t want to pay the higher rates will be forced to pay the actuarial rate if they decide to rejoin the NFIP in the future.
Connor deflected responsibility for the higher rates when responding to a comment by a reporter from a Gulf Coast-area media outlet, who contended that people in that area believe the agency is raising rates to people with so-called “serial claims” because it wants to force them out of their communities.
His response was that, “all these changes were mandated by Congress, not the agency.”
Connor acknowledged that the impact of the new rates will mostly be felt by moderate- and lower-income homeowners.
These include higher premiums for those in areas hit by Sandy who will be required to elevate their properties in order to retain their existing rates.
But, Connor said, dropping out of the program won’t work because flood insurance in areas prone to flooding is required for those who have federally insured mortgages.
If you have a mortgage that is federally insured, and you drop your policy, the mortgage holder will force a policy on you that has a rate equal or higher than those charged by the NFIP,” the FEMA official said.
For those who own their homes and decide to drop their flood insurance, Connor said, depending on payments from the government post-flood is not such a good idea.
“Payments for those without flood insurance with a home worth $150,000 to $200,000 post-flood won’t work,” he said, “because the payments are unlikely to exceed $3,000.”
He acknowledged that higher rates floor flood insurance imposed by the new law is a “tough deal,” especially for those on the lower end of the income scale.
He said that, ideally, rates would be much lower if there was “total penetration,” that is, everyone in a flood zone had flood insurance, or, even more ideally, if everyone with a home is required to have flood insurance.”
“Rates would be more affordable if everyone participates,” he said, but that is unlikely.
As to commissions for agents, he said payments to write-your-own companies for their expenses presume a 15% commission for agents.
Connor said the “size and complexity of the rate changes imposed by the law are too complex to be covered in renewal brochures, but will be available on agency websites. He also noted that agents will be helpful in telling homeowners ways they can “buy-down” their rates, for example, by elevating homes to mandated levels in flood-prone areas.
He also suggested that agents can suggest higher deductibles for those who need lower rates.
He also discussed the “community rating system” used by 1,200 communities to get the rates reduced for those who live within them by following mitigation programs sanctioned by the agency.
“Mitigation efforts can reduce rates,” the FEMA official said.