House Financial Service Committee Issues Report on Private Flood Insurance Market Development Act

WASHINGTON, July 29 -- The House Financial Service Committee issued a report (H.Rpt. 115-220) on legislation (H.R. 1422) to amend the Flood Disaster Protection Act of 1973 to require that certain buildings and personal property be covered by flood insurance. The report was advanced by Rep. Jeb Hensarling, R-Texas, on July 14.

Excerpts of the report follow:

Purpose and Summary

Introduced by Representatives Dennis Ross and Kathy Castor on March 8, 2017, H.R. 1422, the "Flood Insurance Market Parity and Modernization Act", amends the Flood Disaster Protection Act of 1973 to clarify that flood insurance offered by a private carrier outside of the National Flood Insurance Program (NFIP) can satisfy the Act's mandatory purchase requirement. H.R. 1422 defines acceptable private flood insurance as a policy providing flood insurance coverage that is issued by an insurance company that is licensed, admitted, or otherwise approved to engage in the business of insurance in the state or jurisdiction in which the insured property is located. Under H.R. 1422, an acceptable private flood insurance policy may also be issued by an insurance company that is eligible as a non-admitted insurer to provide insurance in the state or jurisdiction where the property to be insured is located.

Background and Need for Legislation

Floods are among the most frequently occurring and costly natural disasters. Most declarations of federal disasters by the Federal Emergency Management Agency (FEMA) are related to flooding. Yet despite the frequency and severity of losses that result from flooding, the private insurance market generally did not provide insurance for flooding; when it did, insurance for flood-related damage can be expensive because the properties most at-risk tend to be highly concentrated geographically and the potential risk of economic losses is extremely high.

To supplement the availability of flood insurance in the private market, Congress, in 1968, created the National Flood Insurance Program (NFIP), which is administered by FEMA and provides flood insurance to approximately 5.1 million policyholders across the country. In exchange for premiums paid by policyholders, NFIP makes federally backed flood insurance available to homeowners and other property owners (for example, businesses, churches, and farmers) in these communities.

Homeowners with mortgages held by federally regulated lenders on property in participating communities identified by FEMA to be in Special Flood Hazard Areas are required to purchase flood insurance (mandatory purchase requirement). NFIP coverage limits vary by program (regular or emergency) and property type (for example, residential or nonresidential). In NFIP's regular program, the maximum coverage limits for residential policyholders are $250,000 for buildings and $100,000 for contents. For commercial policyholders (that is, those with policies for nonresidential properties), the maximum coverage limit is $500,000 per building and $500,000 for contents owned by the building owner. There is additional coverage for contents owned by the tenants.

Residents and business owners in over 22,000 participating communities across the United States and its territories are able to buy NFIP flood insurance policies through insurance agents and companies that participate as third-party administrators in the "Write Your Own" (WYO) program. The WYO program allows private insurance carriers to issue and service government underwritten and taxpayer backed NFIP policies with no private financial liability from the insurer. Insurance companies that participate in the WYO program receive an expense allowance for policies they write and the claims they process. In addition, their agents earn a commission for the policies they sell. The federal government, however, retains responsibility for managing the risk and paying claims, as well as covering any litigation costs should a WYO insurer be sued in court.

Property owners can purchase flood insurance through the NFIP only if their communities participate in the NFIP. To participate in the NFIP, a community must agree to abide by certain statutory provisions intended to mitigate the risk of flooding, such as building codes that require new structures built in floodplains (high-risk areas) to be protected against flooding or to be elevated above the 100-year floodplain.

As of June 5, 2017, the NFIP has an outstanding debt of $24.6 billion borrowed from taxpayers, with roughly $1.1 billion available cash-on-hand and $5.825 billion remaining of its total temporary $30.425 billion Treasury borrowing authority. The NFIP's debt results primarily from its borrowing to pay claims relating to the Gulf Coast hurricanes in 2005 and Superstorm Sandy in October 2012. This borrowing stems from a structural imbalance in how the NFIP measures and prices for risk, resulting in only 46 percent of premium dollars collected in 2016 being available for the payments of claims. With such a low portion of premiums available to pay claims, the pressure on the NFIP to borrow from taxpayers increases. The NFIP's structural budget crisis has required periodic legislation to increase its borrowing authority, the most recent example of which occurred in January 2013 when Congress increased the NFIP's borrowing authority by $9.7 billion--from $20.725 billion to its current $30.425 billion level.

In 1973, Congress passed the Flood Disaster Protection Act, under which federally regulated or insured lenders must require the purchase of flood insurance on properties in high-risk flooding areas if the U.S. government backs the mortgage thereon. While this Act does not require that coverage be provided under the NFIP, its effect, over time, has been to discourage private sector participation in the flood insurance market and funnel virtually all flood risk through the NFIP.

H.R. 1422 would encourage the development of a robust private market by allowing insurers to work directly with their state commissioners to write policies that work for their customers' pricing and coverage needs. Choice and competition will lead to better products, pricing, and innovation and would give consumers another place to turn besides the Federal government for this important safeguard.

Hearings

The Committee on Financial Services' Subcommittee on Housing and Insurance held two hearings examining matters relating to H.R. 1422 on March 9, 2017 and March 16, 2017. The Committee on Financial Services held a hearing examining matters relating to H.R. 1422 on June 7, 2017.

Committee Consideration

The Committee on Financial Services met in open session on June 21, 2017 to consider H.R. 1422. The Committee ordered H.R. 1422 to be reported favorably to the House, as amended, by a recorded vote of 58 ayes to 0 nays (Recorded vote no. FC-65), a quorum being present.

Committee Votes

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion to report legislation and amendments thereto. An amendment in the nature of a substitute offered by Mr. Ross was agreed to by voice vote. The sole recorded vote was on a motion by Chairman Hensarling to report the bill favorably to the House, as amended. The motion was agreed to by a recorded vote of 58 ayes to 0 nays (Recorded vote no. FC-65), a quorum being present.

Committee Oversight Findings

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report.

Performance Goals and Objectives

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House of Representatives, the Committee states that H.R. 1422 will reduce federal regulatory barriers for private insurance carriers to enter the flood insurance market.

New Budget Authority, Entitlement Authority, and Tax Expenditures

In compliance with clause 3(c)(2) of rule XIII of the Rules of the House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by the Director of the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974.

Committee Cost Estimate

The Committee adopts as its own the cost estimate prepared by the Director of the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974.

Congressional Budget Office Estimates

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House of Representatives, the following is the cost estimate provided by the Congressional Budget Office pursuant to section 402 of the Congressional Budget Act of 1974:

U.S. Congress,

Congressional Budget Office,

Washington, DC, July 14, 2017.

Hon. Jeb Hensarling,

Chairman, Committee on Financial Services,

House of Representatives, Washington, DC.

Dear Mr. Chairman: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 1422, the Private Flood Insurance Market Development Act of 2017.

If you wish further details on this estimate, we will be pleased to provide them. The CBO staff contact is Aurora Swanson.

Sincerely,

Mark P. Hadley

(For Keith Hall).

Enclosure.

H.R. 1422--Private Flood Insurance Market Development Act of 2017

Under current law homeowners with mortgages held by federally regulated financial institutions or that are guaranteed by the federal government must maintain a flood insurance policy if the home is located in a flood zone. H.R. 1422 would clarify that flood insurance provided by private firms satisfies that requirement. Today, private flood insurance options are not widely available but some insurance companies are developing analytical tools to underwrite flood insurance policies. Additionally, regulatory agencies are developing rules to clarify that private flood coverage meets the requirement for homeowners to maintain flood insurance. The private market for flood insurance is likely to continue to evolve and some homeowners may obtain private flood coverage.

About 80 percent of the National Flood Insurance Program (NFIP) policies have premiums that equal the expected cost of flood insurance, known as actuarial premiums; such policyholders also pay fees and surcharges to the NFIP that help cover the cost of the program. To the extent that NFIP policyholders that pay actuarial premiums leave the program and obtain private coverage under the bill, there would be a loss of budgetary receipts to the program. CBO cannot determine whether enacting H.R. 1422 would lead to the development of a robust private insurance market that would not otherwise occur, but as the private market for flood insurance policies continues to evolve, the NFIP will probably realize reduced receipts as some policyholders leave the program.

The bill also would direct the Federal Emergency Management Agency to consider policyholders who drop an NFIP policy and then later return to the NFIP as having continuous coverage if they can demonstrate that a flood insurance policy from a private firm was maintained throughout the interim period. That provision would permit policyholders paying a subsidized rate for an NFIP policy--about 20 percent of existing policyholders--to be eligible for subsidized rates if they return to NFIP and have maintained continuous coverage. Because such policyholders are not eligible for subsidized rates if they do not maintain continuous NFIP coverage, enacting that provision would increase direct spending by effectively reducing premiums for those policyholders.

Pay-as-you-go procedures apply because enacting the bill could affect direct spending. However, CBO estimates those effects would not be significant. Enacting the bill would not affect revenues.

CBO estimates that enacting H.R. 1422 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028.

H.R. 1422 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act and would not affect the budgets of state, local, or tribal governments.

The CBO staff contact for this estimate is Aurora Swanson. The estimate was approved by H. Samuel Papenfuss, Deputy Assistant Director for Budget Analysis.

Federal Mandates Statement

The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office pursuant to section 423 of the Unfunded Mandates Reform Act.

Advisory Committee Statement

No advisory committees within the meaning of section 5(b) of the Federal Advisory Committee Act were created by this legislation.

Applicability to Legislative Branch

The Committee finds that the legislation does not relate to the terms and conditions of employment or access to public services or accommodations within the meaning of the section 102(b)(3) of the Congressional Accountability Act.

Earmark Identification

H.R. 1422 does not contain any congressional earmarks, limited tax benefits, or limited tariff benefits as defined in clause 9 of rule XXI.

Duplication of Federal Programs

Pursuant to section 3(c)(5) of rule XIII, the Committee states that no provision of H.R. 1422 establishes or reauthorizes a program of the Federal Government known to be duplicative of another Federal program, a program that was included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 111- 139, or a program related to a program identified in the most recent Catalog of Federal Domestic Assistance.

Disclosure of Directed Rulemaking

Pursuant to section 3(i) of H. Res. 5, 115th Cong. (2017), the Committee states that H.R. 1422 contains no directed rulemaking.

Section-by-Section Analysis of the Legislation

Sec. 1 Short title

This Act may be cited as the "Flood Insurance Market Parity and Modernization Act".

Sec. 2 Private flood insurance

Updates current law to reinforce and strengthen requirements that flood insurance provided by private sector insurance carriers shall be accepted and considered similar to those policies offered by the National Flood Insurance Program (NFIP), provided certain conditions are met. Strikes and restates, in part, the current statute with updated language to reflect the recognition of flood policies offered by the NFIP and the private flood insurance market. Identical to current law, restates the mandatory insurance requirement that any building, mobile home or personal property that would be financed by a federally-backed mortgage must have flood insurance if the property is located in an area designated as a special flood hazard.

Clarifies that the coverage amount of flood insurance provided under either a Federal or private policy must be at least equal to the lesser of: the development or project cost of the building, mobile home, or personal property (less estimated land cost); the outstanding principal balance of the federally insured loan secured by the property; or the maximum limit of Federal flood insurance coverage made available with respect to the particular type of property. If the financial assistance provided is in the form of a loan or an insurance or guaranty of a loan, the amount of required flood insurance need not exceed the outstanding principal balance of the loan and need not be required beyond the term of the loan.

Consistent with current law, Federal banking regulators are required to instruct, by regulation, that regulated institutions not make loans secured by real property located in flood zones unless the property is covered by "flood insurance" (Federal or private). This section clarifies that each Federal banking regulator must require regulated financial institutions to accept Federal (National Flood Insurance Program) and private flood insurance as satisfaction of the flood insurance coverage requirement.

Updates current law to require the Government Sponsored Enterprises (GSEs), known as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, to require flood insurance for any real estate or mobile home located in a special flood hazard area and purchased or guaranteed by such entity. This section would also add a new requirement that GSEs accept Federal (National Flood Insurance Program) and private flood insurance as satisfaction of the mandatory flood insurance coverage requirement, provided that the flood insurance coverage meets the requirements under this bill and any requirements established by the Federal Housing Finance Agency, in consultation with the Federal National Mortgage Association, the Federal Home Loan Corporation, the Secretary of Housing and Urban Development, the Government National Mortgage Association and the Secretary of Agriculture relating to the financial strength of such private insurance companies. Such requirements developed by the GSEs shall not affect or conflict with any state law, regulation, or procedure concerning the regulation of the business of insurance.

This section also clarifies that mortgages offered, insured, or guaranteed by the Department of Housing and Urban Development, or under Title V of the Housing Act of 1949 related to Rural Housing Service programs, or the Government National Mortgage Association would be required to accept private flood insurance policies.

Defines flood insurance as either "Federal flood insurance" or "private flood insurance." "Federal flood insurance" is defined as a policy available through the NFIP. "Private flood insurance" is defined as a flood insurance policy that is issued by a state-licensed insurer, or a non- admitted insurer that is not disapproved by the state as a surplus lines insurer, and that complies with the laws and regulations of the state in which the insured property is located. The term "State" means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the Northern Mariana Islands, the Virgin Islands, and American Samoa.

Clarifies that the Administrator of the Federal Emergency Management Agency shall consider any period during which a property was continuously covered by private flood insurance to be a period of continuous coverage.

Changes in Existing Law Made by the Bill, as Reported

In compliance with clause 3(e) of rule XIII of the Rules of the House of Representatives, changes in existing law made by the bill, as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, and existing law in which no change is proposed is shown in roman):

FLOOD DISASTER PROTECTION ACT OF 1973

The full text of the report is found at: https://www.congress.gov/congressional-report/115th-congress/house-report/220/1?r=32

Myron Struck, editor, Targeted News Service, Springfield, Va., 703/304-1897; [email protected]; http://www.targetednews.com