House Financial Services Committee Issues Report on 21st Century Flood Reform Act (Part 1 of 2)
Purpose and Summary
Introduced by Representative
Background and Need for Legislation
Floods are among the most frequently occurring and costly natural disasters. Most declarations of federal disasters by the
To supplement the availability of flood insurance in the private market,
Homeowners with mortgages held by federally regulated lenders on property in participating communities identified by
Residents and business owners in over 22,000 participating communities across
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
H.R. 2874 reauthorizes the NFIP for five years; provides much needed reforms to ensure it is financially sustainable; enhances incentives and approaches to reduce future flood damages and vulnerabilities; and, ensures that a greater portion of premiums collected are available to pay claims that ultimately result in better protection for taxpayers who have repeatedly backstopped the program.
Instead of operating on an actuarial basis, the NFIP operates on a series of explicit and implicit subsidies, allowing some to pay less while many pay more than their actual flood risk would require. Meanwhile, there is high customer dissatisfaction with the NFIP's operations and flood map approval. Claims payments have remained high; and, over time there has been a disproportionate growth in the amount and number of claims with each new storm and the flood damage that follows.
Through a series of incremental reforms, such as moving the program towards risk based rates, ensuring the proper maintenance of the program's reserve fund, addressing properties that perpetually flood, and providing more transparency to the mapping process, H.R. 2874 will help protect taxpayers and restore the NFIP's financial ledger and provide certainty to the flood insurance marketplace over the next five years.
Hearings
Committee Consideration
Before the motion to report was offered, the Committee adopted by voice vote an amendment offered by
Committee Votes
Clause 3(b) of rule XIII of the Rules of the
Amendments were disposed of as follows:
Heck Amendment (no. 2) was not agreed to by a vote of 26 yeas and 29 nays (Recorded vote no. FC-59)
Crist Amendment (no. 6) was not agreed to by a vote of 26 yeas and 30 nays (Recorded vote no. FC-60)
Tenney Amendment (no. 7) was agreed to by a recorded vote of 31 yeas and 25 nays (Recorded vote no. FC-61)
Waters Amendment in the Nature of a Substitute (no. 9) was not agreed to by a recorded vote of 25 yeas and 31 nays (Recorded vote no. FC-62)
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Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
In compliance with clause 3(c)(2) of rule XIII of the Rules of the
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared by the Director of the
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
U.S.
Hon.
Chairman,
Dear Mr. Chairman: The
If you wish further details on this estimate, we will be pleased to provide them. The CBO staff contact is
Sincerely,
Director.
Enclosure.
H.R. 2874--21st Century Flood Reform Act
Summary: H.R. 2874 would authorize the National Flood Insurance Program (NFIP), which is administered by the
The legislation also would make a number of changes to the NFIP aimed at improving the financial status of the program and encouraging the growth of a private market for flood insurance. CBO estimates that the changes made by this legislation would increase collections from NFIP policyholders but would reduce the number of property owners who purchase insurance through the NFIP. On net, CBO estimates that the changes made by H.R. 2874 would reduce direct spending by
H.R. 2874 also would authorize
Pay-as-you-go procedures apply because enacting the legislation would affect direct spending and revenues.
CBO estimates that enacting H.R. 2874 would not increase net direct spending or on-budget deficits by more than
H.R. 2874 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA).
Estimated Cost to the Federal Government: The budgetary impact of H.R. 2874 would fall within budget function 450, community and regional development (see Table 1).
TABLE 1.--SUMMARY OF ESTIMATED BUDGETARY EFFECTS OF H.R. 2874
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Basis of estimate: For this estimate, CBO assumes that the legislation will be enacted by the end of fiscal year 2017, that changes in NFIP premiums will begin to go into effect for new and renewed policies in the spring of 2018, and that the authorized and necessary amounts will be appropriated for each fiscal year.
Background
The NFIP was established to encourage property owners to purchase flood insurance if they are located in communities that adopt minimum guidelines for floodplain management and that enforce building codes designed to mitigate damage from floods.
Terms for Coverage. Owners of properties that are located within an area designated as having at least a 1 percent chance of being flooded in any year (known as a Special
Premiums. Property owners who buy coverage through the NFIP pay annual premiums, which are deposited into the
The remaining 20 percent of properties insured by the program are charged premiums that are lower than the expected cost of flood damage (known as subsidized premiums). Throughout the program's history,
Other property owners receive cross-subsidies from other policyholders who are charged premiums above their expected cost.1 If cross-subsidies completely balance out, they do not create financial risk for taxpayers. CBO estimates that only those policies that are explicitly subsidized will generate insufficient receipts to cover the cost of expected claims and related expenses.
1For details about premiums, see
In 2016, premium collections from roughly 5 million policyholders totaled about
Additional Collections From Policyholders. All policyholders also pay two additional fees: a reserve fund assessment equal to 15 percent of their premiums and a surcharge equal to
In 2016, a total of
The NFIP's Ability to Pay Claims and Other Expenses. In addition to policyholders' payments of premiums and fees, the NFIF and the
The majority of the NFIP's expenses consist of payments for claims resulting from coverage in force. On the basis of the number of subsidized policies, historical experience, and the current level of coverage in force (about
2CBO's baseline estimates for the NFIP were prepared in the spring of 2017. CBO has not yet updated those baseline estimates to account for the hurricanes that made landfall in August and September of 2017.
Because of the large subsidy that exists for many policies, CBO estimates that annual expenses will--on average--exceed annual income. In most years since the program began operations, annual appropriations along with premiums and fees have been sufficient to cover the NFIP's annual expenses. Before 2005, the program occasionally had to borrow from the
Direct spending
Section 109 would provide
In addition to extending the NFIP's authority to continue to provide insurance, H.R. 2874 would make several changes to the program. Six of those changes would affect direct spending by either adjusting the premiums paid by policyholders or reducing the number of NFIP policies purchased (see Table 2).
TABLE 2.--ESTIMATED CHANGES IN DIRECT SPENDING UNDER H.R. 2874
(TABLE OMITTED)
Some changes would effectively increase the premiums that policyholders pay and thus reduce direct spending.
Specifically, those changes would:
Increase premiums for some pre-FIRM policyholders;
Adjust the NFIP's surcharge;
Adjust premiums for subsidized properties that suffer multiple flood losses; and
Reduce the maximum amount paid to insurers in
Other changes would reduce the number of NFIP policies purchased by property owners and would increase direct spending. Specifically, those changes would:
Bar owners of certain properties from buying insurance through the NFIP;
Require
Eliminate the noncompete requirement for private insurers currently participating in the NFIP's WYO program.
The remaining changes in the bill would affect the amount of premiums collected and the amount of flood insurance coverage purchased, but would have no net effect on direct spending. Specifically, those changes would:
Create a flood insurance affordability program;
Create an option for certain policyholders to pay annual premiums in monthly installments; and
Eliminate certain cross-subsidies among policyholders in the program.
Changes Affecting NFIP Premiums. CBO estimates that the four provisions that would affect the premiums charged to NFIP policyholders would reduce net direct spending by about
Premium Increases for
Based on housing data and current policy information obtained from
Surcharge Adjustments. Under H.R. 2874, surcharges for NFIP policies would increase from
Those changes would affect all NFIP policies, which CBO estimates will total about 5.1 million in 2018. On the basis of the types and numbers of residences in each category, CBO estimates that about 93 percent of policies would face increased surcharges and that those increases would lead to additional net collections of
Premiums for
The bill would require that premiums for any multiple-loss property that is also a pre-FIRM property be increased by at least 15 percent each year until the premiums equal the actuarial premium or until a flood loss generates a claim payment, at which point the property owner would be charged the actuarial premium. Considering the schedule for phasing out subsidies under current law, CBO estimates that increasing premiums for subsidized properties with multiple losses would, on net, increase NFIP collections by
Reducing Payments to WYO Companies. Under current law, private insurance companies partner with
H.R. 2874 would reduce payments to WYO companies from 30.9 percent to 27.9 percent of the premiums charged to NFIP policyholders. CBO expects that policyholders currently paying actuarial rates would see their premiums slightly reduced. That reduction in the cost of insurance would lead to a small increase in purchases of flood insurance and to existing policyholders retaining their policies longer. That boost in the number of actuarial policies would increase collections from reserve fund assessments and surcharges, which would generate income above the amount expected to be required for the NFIP to pay claims for the policies.
Furthermore, under the bill, pre-FIRM policyholders being charged subsidized rates would not see a change in their premiums because of this policy. For those policyholders, the decrease in payments to WYO companies would be retained by the NFIF and effectively reduce the government's costs for the policies.
On the basis of information from
Accounting for those varying effects--the reduction in payments to WYO companies, and the corresponding slight increase in purchases and retention of actuarial policies; the lower subsidy for pre-FIRM policies; and slowed purchases of policies--CBO estimates that this provision would reduce spending by
Changes That Would Reduce the Number of NFIP Policies Purchased. According to CBO's estimates, provisions of H.R. 2874 that would affect the number of policies purchased through the NFIP would reduce the number in force by about 5.2 million over the 2018-2027 period.3 Fewer than 1 percent (or about 40,000) of those policies would be subsidized. The decline in subsidized policies would contribute to the actuarial soundness of the fund because those policies have expected costs that are greater than the premiums paid. However, the decline in all policies also would eliminate the associated reserve fund assessments and surcharges. Under current law, the average reserve fund assessment is about
3Polices are purchased through the NFIP on an annual basis. In this estimate, CBO refers to the number of policies purchased as one policy for each year of coverage. Thus, the number of policies purchased over a 10 year span is a different measure from the number of properties covered by the NFIP in any particular year.
Eliminating WYO Companies' Noncompete Agreement and Making NFIP Data Available to the Public. Sections 201 and 202 would eliminate the "noncompete agreement"that WYO companies must adhere to and would require
On the basis of information from private insurance providers that have expressed interest in entering the flood insurance market, CBO expects that those provisions would increase the growth of the private flood insurance market. In the agency's estimation, private insurers would compete with the NFIP for properties eligible for preferred risk policies and other properties located outside of SFHAs, and they would probably show interest in some properties located in SFHAs as well. Under the bill, CBO estimates that holders of about 690,000 policies that would have been purchased through the NFIP under current law over the 2018-2027 period would instead choose to buy private flood insurance. No property owners who are subsidized by the NFIP would be expected to be among those leaving the program.
Barring Owners of Certain Properties From Buying NFIP Coverage. Sections 505 and 506 would bar certain property owners from purchasing NFIP insurance. Section 505 would deny coverage for any structure for which lifetime losses (beginning after the law's enactment) are more than two times its replacement value. On the basis of an analysis of information from
Section 506 would bar owners of certain newly constructed properties from the NFIP if
According to multiple insurance companies that have expressed interest in entering the private flood insurance market, companies are most interested in selling flood insurance policies to owners of properties that are outside of SFHAs. Although the companies indicate that they may be interested in providing flood insurance for newly constructed properties in SFHAs, CBO expects that the risk of damage from flooding for many locations is too great for such companies to offer such private insurance over the 2021-2027 period. On balance, CBO estimates that approximately 60,000 (or 25 percent) of all the properties that would be affected by this provision would lack a private flood insurance provider and the owners would continue to purchase their insurance through the NFIP.
CBO estimates that the remaining 180,000 properties that would be affected by section 506 and barred from the NFIP starting in 2021 would either purchase flood insurance through a private provider or would forgo coverage. Over the 2021-2027 period, this provision would eliminate about 4.5 million NFIP polices that would otherwise exist under current law.
Other Provisions. CBO expects that three other provisions of H.R. 2874 would affect the amount of NFIP coverage purchased and the amount of premiums collected but would not affect net direct spending.
Flood Insurance Affordability Program. Section 102 would direct
Monthly Installment of Premiums. Under current law,
Section 105 would direct
The bill would allow
Certain Cross-Subsidies. Section 506 would require that certain NFIP cross-subsidies be phased out. Those cross- subsidies allow some properties to be charged premiums that are treated as if they were actuarial but are actually lower than actuarial rates. Because eliminating those cross-subsidies would simultaneously lower premiums for policies that are currently charged higher than actuarial rates and raise premiums for policies that are currently charged lower than actuarial rates, CBO estimates that phasing out those subsidies would have no significant effect on net direct spending.
Revenues
Section 508 would increase, from
Spending subject to appropriation
CBO estimates that, over the 2018-2022 period, implementing H.R. 2874 would cost
Flood Mitigation Assistance. The bill would authorize the appropriation of
Other Changes in Discretionary Spending. H.R. 2874 would make a number of other changes that would affect discretionary spending, including updating the flood map appeals process, implementing an independent actuarial review process, having
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go Act of 2010 establishes budget-reporting and enforcement procedures for legislation affecting direct spending or revenues. The net changes in outlays and revenues that would be subject to those procedures under H.R. 2874 are shown in Table 3.
TABLE 3.--CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 2874 AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON
(TABLE OMITTED)
Increase in long-term direct spending and deficits: CBO estimates that enacting H.R. 2874 would not increase net direct spending or on-budget deficits by more than
Intergovernmental and private-sector impact: H.R. 2874 contains no intergovernmental or private-sector mandates as defined in UMRA.
Estimate prepared by: Federal costs:
Estimate approved by:
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the
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. 2874 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. 2874 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
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of
Continues with Part 2 of 2
House Financial Services Committee Issues Report on 21st Century Flood Reform Act (Part 2 of 2)
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