Swamped Flood Insurance Program Has the Tide Against It

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By David Schultz

Nearly everyone on Capitol Hill acknowledges two facts about the federal flood insurance program: The status quo is totally unsustainable, and it probably won’t change any time soon.

From a financial standpoint, it’s hard to argue that the National Flood Insurance Program is anything other than insolvent.

Since Hurricane Katrina, the program has had to “borrow” more than $30 billion of taxpayer money, even though it was designed to cover its own costs when Congress created it 50 years ago. Last year, Congress canceled more than half of the $30 billion debt because if it didn’t, the program might not have been able to cover losses from Hurricanes Harvey, Irma, and Maria.

And yet, despite Republicans controlling both chambers of Congress, an agreement on how to shore up its finances has proven nearly impossible to reach. The program was set to expire on Sept. 30, 2017, and since then, it has received six short-term extensions, one of which lasted just 14 days. It is now slated to lapse on July 31.

That July 31 deadline was set in a bill that funds the government through the end of this fiscal year in September. Republican House staffers told Bloomberg Environment that this was done intentionally as a way to force the Senate to vote on the program by itself, rather than as part of a must-pass spending bill.

Flood insurance scrambles the typical Washington political dynamic. The issue doesn’t pit Republicans against Democrats but, instead, coastal lawmakers against those from landlocked areas.

Staffers acknowledged that lawmakers who represent coastal areas have a strong incentive to push for yet another short-term extension rather than an overhaul. Though premiums are rising quickly under the current program, these lawmakers fear that radically changing it might mean that their constituents wouldn’t be able to purchase policies at any price, making it effectively impossible to ever sell their homes.

Insurers Have Left Program

The Federal Emergency Management Agency acts as an underwriter for the program but, in most cases, private insurers write and service the program’s more than five million policies.

Several large insurers, like State Farm and Nationwide, have dropped out of the program in recent years. State Farm cited the uncertainty of Congress’ short-term extensions of the program as the reason why it dropped out in 2010, according to a company statement cited by several news outlets.

But while this uncertainty can be bad for business, policy changes that may be on the horizon would give private companies a much larger role to play in selling flood insurance, a market that currently generates roughly $3.6 billion in premiums every year, according to FEMA statistics.

It’s not surprising, then, that at least half a dozen insurers—State Farm, Prudential, Nationwide, Liberty Mutual, Farmers, and Willis—have been lobbying Congress and federal agencies on this issue over the past year, according to lobbying data analyzed by Bloomberg Environment.

Tom Santos, who runs federal affairs with the American Insurance Association, said the firms he represents just want clarity about what the program will look like in the future. He also said privatization makes sense, but only if the pool of homeowners who are required to purchase policies is greatly expanded.

However, he said that whether Congress does or doesn’t act to overhaul this program before it expires, something’s got to give: The current model of taxpayers periodically bailing out a government-run insurance program is truly unsustainable, especially with communities facing new climate change-driven flooding threats.

“Companies do have something to gain and lose, but as a broader matter, communities have all the risk,” Santos told Bloomberg Environment. “If you can’t insure the risk, communities are in big trouble.”

The Hartford and Allstate, which both participate in the program, declined to comment.

House Bill

The House passed a bill (H.R. 2874) that would extend the flood insurance program out to 2022 and would also make several policy changes meant to put it on solid financial ground. The bill would allow FEMA to impose larger premium increases than are currently allowed, especially for property owners who have submitted multiple claims in the past.

It would also block FEMA from issuing policies for high flood risk properties if their owners won’t raise their the elevation of their structures or take other measures to mitigate future damage.

The bill passed the house in November. Since then, the Senate has taken no action on it, with coastal lawmakers from both parties balking at the new costs it could impose on their constituents.

“The House bill looks like something I wrote with my left hand,” Sen. John N. Kennedy told Bloomberg Environment.

Kennedy, a right-handed Republican from Louisiana, added that the bill would “gut the entire program,” he said.

“What’s the point of a program that doesn’t help anyone?” Kennedy said.

Sen. Sheldon Whitehouse (D-R.I.) also told Bloomberg Environment that he is “not happy” with the House bill.

Geographic Divide

The geographic disparity of flooding risks has made the politics here far more complex than a simple Republicans-vs.-Democrats issue.

Republicans are divided between lawmakers such as Kennedy, who represent areas where unaffordable flood insurance premiums can tank an entire real estate market, and deficit hawks, who believe a government-run insurance program is fiscally unsound and distorts the free market.

Democrats are no more united on the issue. Many also represent areas where subsidized flood insurance is an economic necessity. But other Democrats, such as Rep. Earl Blumenauer (D-Ore.), believe the program makes it harder to respond to worsening climate-driven weather disasters because it blunts the risk of building on the coast.

Blumenauer, one of the co-authors of the House bill, was one of only 15 Democrats who voted for it on the floor.

“Congress can try to avoid dealing with the costs of disaster preparedness, but when the storm hits, the full bill will come due,” he told Bloomberg Environment in an email. “We should continue to press for reform of the program now, while we have time to make the necessary changes.”

Status Quo

Whitehouse, arguably the most active senator on climate change issues, said any reform of the flood insurance program that makes it into law probably won’t end up looking anything like the House bill.

“The Senate will need to pass its own” legislation, he said. “This will be a situation where the House passes its bill, the Senate passes its bill, and there’s a big conference or a pre-conference to work everything out.”

It remains to be seen whether the Senate can carve out enough time to pass a bill and work out its differences with the House before the July 31 deadline, with two week-long recesses scheduled before then and with many members eager to return to their home states to begin campaigning for this fall’s election.

Inaction might not necessarily be a bad thing for Caitlin Berni, vice president of policy at Greater New Orleans Inc., a group that pushes for economic growth in the Crescent City.

She said her city, one of the most at risk for floods in the country, might get a better result if it can hold out until next year after the retirement of several fiscal conservative lawmakers. This includes Rep. Jeb Hensarling (R-Texas), a gatekeeper for any insurance-related legislation as the chairman of the House Financial Services Committee.

“It may be a wiser course of action to do short-term extensions and then work in the next Congress to do a broader overhaul in an environment that’s more favorable,” Berni told Bloomberg Environment.

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