House Financial Services Committee Issues Report on National Flood Insurance Act

WASHINGTON, July 29 -- The House Financial Services Committee issued a report (H.Rpt. 115-221) on legislation (H.R. 2565) to require the use of replacement cost value in determining the premium rates for flood insurance coverage under the National Flood Insurance Act. The report was advanced by Rep. Jeb Hensarling, R-Texas, on July 14.

Excerpts of the report follow:

Purpose and Summary

Introduced by Representative Blaine Luetkemeyer on May 19, 2017, H.R. 2565 would require the use of replacement cost value in determining the premium rates for flood insurance coverage under the National Flood Insurance Act, and for other purposes, would require the Federal Emergency Management Agency (FEMA) to conduct a study on the feasibility of incorporating the actual replacement cost value for each National Flood Insurance Program covered property. Additionally, H.R. 2565 amends the National Flood Insurance Act of 1968 to require FEMA to use actual replacement cost values as part of the determination of chargeable risk premiums.

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.

H.R. 2565 would require FEMA to conduct a study to evaluate insurance industry best practices for risk rating and classification, including practices related to replacement cost value in premium rate estimation. Upon submission of the study to Congress, the bill requires FEMA to incorporate up-to-date replacement cost values, by structure, when calculating annual chargeable premium rates, as opposed to the current practice that relied upon a national average, over a 1-3 year period.

In FEMA's documents that outline the methods used to develop flood insurance premiums, the agency states that it does not consider actual replacement costs when it determines NFIP premiums. Instead, the NFIP uses fixed national averages for replacement costs when it determines customer premiums. By using fixed replacement values based on historical averages, the NFIP's current premium construction process guarantees that the lower-income policyholders will subsidize wealthier homeowners, because policyholders below the average would pay up to that national average and policyholders above the average (higher income policyholders) would pay down to that national average.

H.R. 2565 fixes this inequity and provides relief to lower- income policyholders by requiring the NFIP to incorporate up- to-date replacement cost values, by structure, when calculating annual chargeable premium rates, as opposed to the current practice that relies upon a national average.

Hearings

The Committee on Financial Services' Subcommittee on Housing & Insurance held two hearings examining matters relating to H.R. 2565 on March 9, 2017 and March 16, 2017. The Committee on Financial Services held a hearing examining matters relating to H.R. 2565 on June 7, 2017.

Committee Consideration

The Committee on Financial Services met in open session on June 15, 2017 to consider H.R. 2565. The Committee ordered H.R. 2565 to be reported favorably to the House, as amended, by a recorded vote of 34 ayes and 25 nays (Recorded vote no. FC-66), a quorum being present. Before the motion to report was offered, the Committee adopted an amendment offered by Mr. Luetkemeyer, by voice vote, 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. The sole recorded vote was on a motion by Chairman Hensarling to report the bill, as amended, favorably to the House. The motion was agreed to by a recorded vote of 34 ayes and 25 nays (Recorded vote no. FC-66), 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. 2565 will protect taxpayers and policyholders by incorporating up- to-date replacement cost values, by structure, when calculating annual chargeable premium rates.

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. 2565, a bill to require the use of replacement cost value in determining the premium rates for flood insurance coverage under the National Flood Insurance Act, and for other purposes.

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

Sincerely,

Mark P. Hadley

(For Keith Hall).

Enclosure.

H.R. 2565--A bill to require the use of replacement cost value in determining the premium rates for flood insurance coverage under the National Flood Insurance Act, and for other purposes

Summary: H.R. 2565 would direct the Federal Emergency Management Agency (FEMA) to analyze different methods and develop a plan for incorporating the actual replacement cost of each structure insured by the National Flood Insurance Program (NFIP) into the premium charged to each property owner. The bill also would require FEMA to submit the plan and an analysis of any alternative plans it considered to the Congress. FEMA would then be required to phase in its plan over a three-year period.

CBO estimates that implementing H.R. 2565 would cost $15 million over the 2018-2022 period, assuming appropriation of the necessary amounts. CBO estimates that enacting the legislation would affect direct spending; therefore, pay-as- you-go procedures apply. However, those effects would not be significant. Enacting the bill would not affect revenues.

CBO estimates that enacting H.R. 2565 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028.

H.R. 2565 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA) and would not affect the budgets of state, local, or tribal governments.

Estimated cost to the Federal Government: The estimated budgetary effect of H.R. 2565 is shown in the following table. The costs of this legislation fall within budget function 450 (community and regional development).

(TABLE OMITTED)

Basis of estimate: For this estimate, CBO assumes that H.R. 2565 will be enacted near the end of fiscal year 2017 and that the necessary amounts will be appropriated each year. Estimated outlays are based on historical spending patterns for similar programs.

NFIP policies are available to insure up to $250,000 of the value of residential properties or up to $500,000 of the value of nonresidential properties. In general, properties with a greater replacement value incur more costly flood claims than those with smaller replacement values--even when those properties face the same risk of flooding. However, properties that face the same flood risk are charged the same premium even if the replacement value of those structures is significantly different. Under current law, FEMA accounts for the different replacement value of structures with NFIP policies by incorporating an under-insurance adjustment factor. That adjustment factor is applied to all NFIP premiums such that premiums are sufficient to cover expected claims.

Under H.R. 2565, FEMA would be required to develop and implement a plan to incorporate the replacement value of each individual insured structure into the premium charged to the owner of that structure. That would change the methodology for determining the adjustment factor for replacement values: instead of using an average factor to adjust all policies, FEMA would be required to calculate and use a specific adjustment factor for each individual policy based on its coverage premiums and the replacement value of the individual structure.

CBO expects the changes required under H.R. 2565 would not significantly alter the total amount of premiums collected from NFIP policyholders in any year. Rather, the changes would adjust some policyholders' premiums upward and other policyholders' premiums downward such that the total premium collections would remain about the same as they otherwise would be under current law.

According to FEMA, the agency is already preparing to determine how to incorporate replacement cost value into premiums as a part of a larger effort to redesign premiums for the NFIP. Based on an analysis of information from by FEMA, CBO estimates that implementing H.R. 2565 would cost $15 million over the 2018-2022 period to obtain additional data from policyholders to complete the redesign of NFIP premiums and incorporate replacement values for each policy.

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. Because using a specific under-insurance adjustment factor for each individual NFIP policy rather than an average adjustment factor for all policies would not affect the total NFIP premiums collected, CBO expects that enacting H.R. 2565 would have no significant effect on direct spending in any year. Enacting the bill would not affect revenues.

Increase in long-term direct spending and deficits: CBO estimates that enacting H.R. 2565 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028.

Intergovernmental and private-sector impact: H.R. 2565 contains no intergovernmental or private-sector mandates as defined in UMRA and would not affect the budgets of state, local, or tribal governments.

Estimate prepared by: Federal costs: Robert Reese; Impact on state, local, and tribal governments: Rachel Austin; Impact on the private sector: Logan Smith.

Estimate 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. 2565 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. 2565 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. 2565 contains no directed rulemaking.

Section-by-Section Analysis of the Legislation

Sec. 1 Use of replacement cost in determining premium rates

The Administrator shall conduct a study to evaluate insurance industry best practices for risk rating and classification, including practices related to replacement cost value in premium rate estimations and developing a feasible implementation plan and projected timeline for including replacement costs value in the estimates of risk premium rates for flood insurance made available under the NFIP. Effective twelve months after the bill's enactment, the Administrator shall submit to Congress a report that contains the results and conclusions of the study. The report shall include an analysis of the recommendations resulting from the study and any potential impacts on the NFIP; a description of any actions taken by the Administrator to implement the study recommendations; and a description of any study recommendations that have been deferred or not acted upon. This section also requires the Administrator to incorporate up-to-date replacement cost values, by structure, when calculating annual chargeable premium rates, as opposed to the current practice that relied upon a national average, over a 1-3 year period.

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 (new matter is printed in italics and existing law in which no change is proposed is shown in roman):

NATIONAL FLOOD INSURANCE ACT OF 1968

MINORITY VIEWS

H.R. 2565 would require the Federal Emergency Management Agency (FEMA) to study and then immediately implement a change in the way flood insurance rates are calculated. Currently, FEMA uses a national average replacement value when setting rates. H.R. 2565 would require FEMA to instead use the specific replacement value of the property to be insured. While this would result in more precise rates for the specific property, it could result in higher premiums for certain properties across the country.

The use of a national average means that, in general, policyholders with properties below the average value may be overpaying for flood insurance, while policyholders with properties above the average value may be underpaying for flood insurance. This is an issue that should be further studied.

However, Congress should have the opportunity to review the results of the study to better determine exactly what the impacts will be if this change were enacted. At this time, it is unclear what the "pivot point" at which premiums would be affected, and it is equally unclear how fast or by how much premiums would rise or fall as a result of this change.

Given the broader affordability challenges associated with flood insurance premiums, we must be cautious in calling for changes that could have unintended consequences on flood insurance costs. If flood insurance becomes widely unaffordable, this could have devastating consequences on the housing market as policyholders lose the ability to purchase coverage, and are left unprotected in the event of a flood.

For these reasons, we oppose H.R. 2565.

Maxine Waters.

Michael E. Capuano.

Carolyn B. Maloney.

Keith Ellison.

Stephen F. Lynch.

Joyce Beatty.

Vicente Gonzales.

Gwen Moore.

Brad Sherman.

Al Green.

Emanuel Cleaver.

Daniel T. Kildee.

Charlie Crist.

Nydia Velazquez.

Gregory Meeks.

The full text of the report is found at: https://www.congress.gov/congressional-report/115th-congress/house-report/221/1?r=31

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