House Financial Services Committee Issues Report on Taxpayer Exposure Mitigation Act
Targeted News Service
WASHINGTON, Aug. 1 -- The House Financial Services Committee issued a report (H.Rpt. 115-255) on legislation (H.R. 2246) to repeal the mandatory flood insurance coverage requirement for commercial properties located in flood hazard areas and to provide for greater transfer of risk under the National Flood Insurance Program to private capital and reinsurance markets. The report was advanced by Rep. Jeb Hensarling, R-Texas, on July 25.
Excerpts of the report follow:
Purpose and Summary
Introduced on April 28, 2017, by Representative Blaine Luetkemeyer, H.R. 2246, the "Taxpayer Exposure Mitigation Act of 2017", amends the Flood Disaster Protection Act of 1973 to repeal the mandatory flood insurance coverage requirement for commercial properties located in flood hazard areas and to provide for greater transfer of risk under the National Flood Insurance Program to private capital and reinsurance markets, and for other purposes.
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 policholders, 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 billionTreasury 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. 2246 addresses concerns that the NFIP's fiscal condition is unsustainable and recognizes that further reforms are needed to optimize efficiency and instill market discipline. H.R. 2246 would require the FEMA Administrator to annually cede a portion of the NFIP's risk to the private reinsurance or capital markets in an amount determined by the Administrator that is sufficient to maintain the program's ability to pay claims, and limit exposure to flood loss. H.R. 2246 would also provide the FEMA Administrator the ability to enter into multi-year contracts for risk transfers.
Historically, the NFIP had been limited to using flood insurance premiums, available surplus, borrowing capacity from the U.S.Treasury, and direct appropriations from Congress to pay claims. In 2012, the Biggert-Waters Flood Insurance Reform Act clarified FEMA's authority to secure reinsurance from the private reinsurance and capital markets. In fact, in January 2017, FEMA, in an attempt to understand the reinsurance market, acquired approximately $1 billion in reinsurance coverage to insure against 26 percent of losses between $4 billion and $8 billion. H.R. 2246 provides more clarity and guidance on how and when FEMA would provide for risk transfers that maximize FEMA's resources and protect taxpayers from catastrophic losses. H.R. 2246 would permit several types of risk transfers, including traditional reinsurance, catastrophe bonds, collateralized reinsurance, resilience bonds, insurance-linked securities and other types of risk transfers that may be created in the future.
In recognition of the inefficiencies of the NFIP in the commercial and multifamily properties, H.R. 2246 would eliminate the mandatory purchase requirement for commercial and multifamily properties, while preserving the eligibility of such properties to voluntarily purchase NFIP coverage if they so choose. Today, commercial and multifamily properties, oftentimes valued many times over the maximum $500,000 NFIP coverage amount, are forced to purchase both NFIP and excess coverage. H.R. 2246 would rationalize the flood insurance market for commercial and multifamily properties by deferring to the lender to determine whether the loan's collateral will be required to be covered by flood insurance. This rationalization would save costs for commercial and multifamily properties by shedding NFIP regulatory requirements that are inconsistent with insurance market practices.
H.R. 2246, however, would ensure that commercial and multifamily properties have access to flood insurance by making it permissive for these properties to purchase NFIP policies. As a result, commercial and multifamily properties can opt for policies that better fit their coverage requirements such as purchasing umbrella policies for a group of properties.
In recognition of the challenges that plagued the development of timely flood rate risk maps, H.R. 2246 authorizes alternative community flood maps, developed and financed by local governments. Today, FEMA is required to review each community, once every five years, to determine whether re-mapping is necessary. In some cases, however, remapping does not occur for over 10 years, thereby leaving the community subjected to outdated maps. H.R. 2246 would require the Technical Mapping Advisory Council (TMAC) to develop and make recommendations to the FEMA Administrator to establish a set of standards, guidelines, and procedures for State and local governments to develop alternatives maps to the NFIP's rate maps.
Subject to certification and approval by the FEMA Administrator, these community maps would be the flood insurance rate map for the purposes of the NFIP, with respect to the area covered on the map. Community maps would be an avenue for those communities, who desire re-mapping of their areas on a more frequent basis or elect to use their local resources to use updated technology, often not available to FEMA, to produce community maps that provide more detailed data than provided by the agency.
The Committee on Financial Services' Subcommittee on Housing & Insurance held two hearings examining matters relating to H.R. 2246 on March 9, 2017 and March 16, 2017. The Committee on Financial Services held a hearing examining matters relating to H.R. 2246 on June 7, 2017.
The Committee on Financial Services met in open session on June 21, 2017 to consider H.R. 2246. The Committee ordered H.R. 2246 to be reported favorably to the House, as amended, by a recorded vote of 36 ayes to 24 nays (Recorded vote no. FC-67), a quorum being present.
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 offered by Mr. Luetkemeyer 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 36 ayes to 24 nays (Recorded vote no. FC-67), 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. 2246 will benefit taxpayers and policyholders by repealing the mandatory flood insurance coverage requirement for commercial properties located in flood hazard areas and providing for greater transfer of risk under the National Flood Insurance Program to private capital and reinsurance markets.
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:
Congressional Budget Office,
Washington, DC, July 24, 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. 2246, the Taxpayer Exposure Mitigation Act of 2017.
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, Director).
H.R. 2246--Taxpayer Exposure Mitigation Act of 2017
Summary: H.R. 2246 would eliminate the requirement for commercial properties in flood zones to have flood insurance if the properties are financed by a federally regulated lending institution, or a federal lender. The bill also would require the Federal Emergency Management Agency (FEMA) to acquire coverage for a portion of the National Flood Insurance Program's (NFIP) potential cost from the private reinsurance or capital markets annually. Finally, H.R. 2246 would require FEMA to permit localities to develop and submit their own maps of local flood risks for FEMA's review and approval for use in determining NFIP insurance rates.
The cost to enact H.R. 2246 is uncertain and would depend on the number of commercial properties that drop NFIP coverage. CBO estimates that enacting H.R. 2246 would increase direct spending by $325 million over the 2018-2027 period, although costs could be significantly higher or lower. CBO also estimates that implementing the bill would cost $40 million over the 2018-2022 period, assuming appropriation of the necessary amounts.
Because enacting H.R. 2246 would affect direct spending, pay-as-you-go procedures apply. Enacting the legislation would not affect revenues.
CBO estimates that enacting H.R. 2246 would not increase net direct spending or on-budget deficits by more than $5 billion in any of the four consecutive 10-year periods beginning in 2028.
H.R. 2246 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA) and would impose no costs on state, local, or tribal governments.
Estimated cost to the Federal Government: The estimated budgetary effect of H.R. 2246 is shown in the following table. The costs of this legislation fall within budget function 450 (community and regional development).
Basis of estimate: For this estimate, CBO assumes that H.R. 2246 will be enacted near the end of fiscal year 2017 and that the necessary amounts will be appropriated for each fiscal year.
Under current law, residential and commercial property owners can choose to buy flood insurance through the NFIP. Property owners who buy coverage through the NFIP pay annual premiums which are deposited into the National Flood Insurance Fund (NFIF) and are used to pay flood damage claims submitted by policyholders.
Mandatory Purchase Requirement. 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 Flood Hazard Area, or SFHA) and that are financed by a federally regulated lending institution, government sponsored enterprise for housing, or federal lender are required to carry flood insurance. Property owners not receiving financing from those entities or located outside an SFHA may purchase flood insurance coverage from a private carrier or the NFIP at their discretion. The level of compliance with this requirement is unknown.
Currently, there are about 5 million properties insured by the NFIP. Of those properties, about 340,000 (or 6.7 percent) are commercial properties, CBO estimates. How many of those properties are subject to the mandatory purchase requirement is unknown because the properties' lending institutions are required to enforce the requirement and aggregate data on properties subject to that requirement do not exist.
Premiums. Most properties, about 80 percent, are charged a premium based on FEMA's estimate of the expected cost to insure those properties against damages caused by flooding, what CBO calls actuarial premiums. The remaining 20 percent of NFIP insured properties are charged premiums that are lower than the expected cost of flood damage, what CBO calls subsidized premiums. In 2016, collections from actuarial and subsidized premiums totaled about $3.5 billion. In 2017, the average NFIP premium for commercial properties is about $2,400.
Additional Collections. All NFIP policyholders also pay a Reserve Fund Assessment (RFA) equal to 15 percent of their premium and a surcharge equal to $25 for policies that cover primary residences and $250 for policies that cover nonprimary residences or commercial properties. Both the RFA and surcharge are deposited into the NFIP Reserve Fund and are available to pay policyholder claims if amounts in the NFIP are insufficient. In 2016, a total of $919 million was deposited into the Reserve Fund. In 2017, the average RFA and surcharge was about $600 for commercial properties.
Reinsurance. The NFIP is also authorized to purchase reinsurance from private reinsurance or capital markets. Reinsurance is a mechanism by which a primary insurer, like the NFIP, can guard against catastrophic losses by paying a premium to one or multiple private entities that then assume the liability to pay certain claims at an agreed upon level of losses. In 2017, the NFIP purchased about $1 billion of reinsurance for a single flood with insurable claims between $4 billion and $8 billion. The NFIP paid a premium of $150 million for that reinsurance and the coverage will last through January 1, 2018.
The bill would eliminate the requirement to buy flood insurance for commercial properties located in an SFHA and would require FEMA to purchase reinsurance in the private market.
Commercial Property. Using a database of NFIP policy information, CBO estimates that in 2017 there are approximately 230,000 commercial structures in SFHAs with NFIP policies, of which 40 percent pay subsidized premiums. FEMA does not track which NFIP insured properties are subject to that mandatory purchase requirement, but CBO expects the majority (about 75 percent) of those properties have a loan from a federally regulated lending institution. Thus, CBO estimates that in 2017 approximately 170,000 commercial properties are subject to the requirement to purchase flood insurance.
In 2014, the Government Accountability Office (GAO) reported that many property owners do not recognize the potential damage that may be caused to their property by a flood and underestimate the risk of a flood to their property.1 While CBO cannot determine how many commercial properties subject to the mandatory purchase requirement have NFIP coverage solely because they are required to, we expect that many such property owners underestimate their flood risk. Owners of commercial property face NFIP premiums and fees that average about $3,000 per year. CBO expects that within a few years about half of the owners of commercial properties currently subject to the mandatory purchase requirement would discontinue buying flood insurance under H.R. 2246. CBO is unaware of any empirical information about the propensity of individuals to drop mandated insurance requirements when given the opportunity. However, because many property owners underestimate the risks they face from flooding, CBO expects that a significant number of commercial policyholders would gradually drop coverage if they were not required to have it.
1See Government Accountability Office, Overview of GAO's Past Work on the National Flood Insurance Programs (May 2014).
Based on an analysis of information provided by FEMA on the premiums, surcharges, other assessments paid by commercial property owners, and the expected cost to insure them, CBO estimates that enacting this provision would increase net direct spending by $325 million over the 2018-2027 period from the loss of RFA and surcharge collections from commercial properties that would have been paying actuarial premiums. That decrease in collections would be partially offset by fewer claims resulting from fewer policyholders. Subsidized policy holders that elected to drop NFIP coverage would reduce net spending because the expected cost of those policies is greater than the premiums paid for the coverage.
CBO's estimated costs are uncertain and costs could be significantly greater or smaller than we have estimated. CBO is confident that some commercial property policyholders would drop NFIP coverage under H.R. 2246 at a net cost to the program. However, without basic information about which policyholders are required to maintain coverage, this estimate has a wide range of uncertainty.
Reinsurance. Section 3 of H.R. 2246 would require the NFIP to transfer a portion of the program's risk to private reinsurance or capital markets at least once per year in a manner that would ensure that enough funds are in the NFIP to cover claims in a typical year. Under current law, FEMA plans to purchase additional reinsurance for the NFIP after the expiration of the current coverage in 2018. Because FEMA intends to continue purchasing reinsurance in future years, CBO estimates that enacting this provision would have no significant effect the amount of reinsurance coverage the agency buys or on NFIP spending.
Spending subject to appropriation
Section 4 of H.R. 2246 would direct FEMA to create standards and requirements for states and localities that choose to develop alternative maps to the Flood Insurance Rate Maps created by FEMA. The section also would require FEMA to determine within six months of receiving any proposed alternative maps from states or localities whether to approve such maps for NFIP rate setting purposes.
Based on an analysis of information provided by FEMA, CBO estimates that implementing this section would cost $1 million in 2018 to establish administrative procedures to review and approve community flood maps and $10 million each year thereafter to review, analyze, and make a determination on community flood maps that would be submitted by local jurisdictions around the country. Such spending would be subject to appropriation. In 2017, $178 million was appropriated for FEMA's flood mapping and related activities.
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 that are subject to those pay-as-you-go procedures are shown in the following table.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 2246, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON JUNE 21, 2017
Increase in long-term direct spending and deficits: CBO estimates that enacting H.R. 2246 would not increase net direct spending or on-budget deficits by more than $5 billion in any of the four consecutive 10-year periods beginning in 2028.
Intergovernmental and private-sector impact: H.R. 2246 contains no intergovernmental or private-sector mandates as defined in UMRA and would impose no costs on 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.
H.R. 2246 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. 2246 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. 2246 contains no directed rulemaking.
Section-by-Section Analysis of the Legislation
Sec. 1. Short title
This Act may be cited as the "Taxpayer Exposure Mitigation Act of 2017".
Sec. 2. Opt-out of mandatory coverage requirement for commercial properties
Amends the Flood Disaster Protection Act of 1973 and the National Flood Insurance Act of 1968 to eliminate the NFIP's mandatory purchase requirement for all commercial and multifamily properties, while preserving the eligibility of commercial and multifamily properties to voluntarily purchase NFIP coverage if they so choose. Residential properties financed by commercial loans would be treated similar to other commercial and multifamily properties.
Sec. 3. Risk transfer requirement
No later than 18 months after bill enactment, the FEMA Administrator shall annually cede a portion of the risk of the NFIP to the private reinsurance or capital markets, as determined by the Administrator, in an amount that (i) is sufficient to maintain the ability of the program to pay claims; and (ii) manages and limits the annual exposure of the NFIP to flood losses in accordance with the probably maximum loss target established each such year. The Administrator shall establish the probable maximum loss target for the NFIP that is expected to occur such fiscal year. In establishing the probably maximum loss target, the Administrator shall consider--(i) the probable maximum loss targets for other U.S. public natural catastrophe insurance program, including State wind pools and earthquake programs; (ii) the probably maximum loss targets of other risk management organization, including the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation; (iii) catastrophic, actuarial, and other appropriate data modeling results of the NFIP portfolio; (iv) the availability of funds in the National Flood Insurance Fund; (v) the availability of funds in the National Flood Insurance Reserve Fund; (vi) the availability of NFIP borrowing authority; (vii) the ability of the Administrator to repay outstanding debt; (viii) amounts appropriated to the Administrator to carry out the NFIP; (ix) reinsurance, capital markets, catastrophe bonds, collateralized reinsurance, resilience bonds, and other insurance-linked securities, and other risk transfer opportunities; and (x) any other factor the Administrator determines appropriate.
Gives the Administrator the ability to enter into multi- year contracts for reinsurance.
Sec. 4. Private or community flood maps
Twelve months after bill enactment, the Technical Mapping Advisory Council (TMAC) shall develop and make recommendations to the FEMA Administrator to establish a set of standards, guidelines, and procedures for state and local governments to develop alternative maps. Subject to certification and approval by the Administrator, the map shall be considered the flood insurance rate map in effect for all purposes of the NFIP, with respect to the area covered by the map.
Until the Administrator promulgates regulations implementing this section, the Administrator may adopt policies and procedures necessary to implement this section without undergoing notice and comment rulemaking.
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 italic, and existing law in which no change is proposed is shown in roman):
FLOOD DISASTER PROTECTION ACT OF 1973
H.R. 2246 would repeal the federal requirement to purchase flood insurance for commercial properties and multifamily properties with commercial financing. The Federal Disaster Protection Act requires properties located in a special flood hazard area with a federally-backed mortgage to be covered with flood insurance. Under the law, commercial properties must obtain a maximum of $500,000 of coverage per structure. H.R. 2246 creates a wholesale exemption from this requirement for all commercial properties regardless of size, sophistication, or loan amount.
Some stakeholders have argued that the mandatory purchase requirement is superfluous and cumbersome for large and sophisticated commercial entities who need coverage well above the current maximum coverage of $500,000 available from the National Flood Insurance Program (NFIP). These entities often purchase flood insurance in the private market because the NFIP does not provide enough coverage for their needs. But due to perceived ambiguity as to whether that private policy counts as compliance with the mandatory purchase requirement, some entities resort to buying a first-dollar NFIP policy in addition to an excess private policy rather than simply purchasing one private policy to cover all of their needs. Some stakeholders have also expressed concern with the mandatory purchase requirement as it relates to the purchase of blanket insurance policies. The NFIP currently does not provide blanket policies, and instead requires separate policies for each individual structure. This can be administratively inefficient and cumbersome for commercial entities with multiple structures.
H.R. 2246 presents an overly broad solution for issues that are specific to large commercial entities, and a number of groups have expressed their opposition to this wholesale exemption. The Independent Community Bankers, for example, oppose this provision because it would harm community banks and small businesses because it increases the likelihood that the collateral they are securing would be unprotected and likely suffer a loss in the event of a flood. The flood insurance take-up rate for properties outside of this mandatory purchase requirement is extremely low, meaning that most people who aren't required to buy flood insurance do not purchase it. That is why a coalition of stakeholders representing the commercial and multifamily real estate industry have expressed concerns about affordability challenges for low- and mid-value properties that will likely opt to forgo flood insurance if given the choice. This creates a ripple effect in the case of a flood where the road to recovery is longer and more difficult for businesses in flood zones.
H.R. 2246 also requires the Federal Emergency Management Agency (FEMA) to annually cede a portion of its risk to the private reinsurance or capital markets, which could lead unnecessarily to higher costs on the NFIP and subsequently higher premiums on policyholders. The Biggert-Waters Act of 2012, clarified that FEMA has the authority to purchase reinsurance from the private reinsurance and capital markets and in the past two years, FEMA has exercised this authority as appropriate. In January of this year, FEMA agreed to a transfer of $1.042 billion of the NFIP's financial risk to 25 reinsurers through January 1, 2018. The reinsurance contract, which cost FEMA$150 million in premium, requires the reinsurers to cover 26 percent of losses in a single flooding event between $4 billion and $8 billion. According to FEMA, there is a 17.2 percent chance of triggering this clause in 2017. Further, FEMA intends to use its current authority to make future reinsurance purchases.1
Notwithstanding FEMA's actions and multi-year plan to further engage the reinsurance markets, H.R. 2246 would place cumbersome requirements on FEMA with regard to how much risk it must cede to the private sector. Specifically, the bill would require FEMA to make this determination in accordance with a probable maximum' loss (PML) target, which departs from traditional PML metrics would hamstring FEMA's ability to negotiate the best deal possible for the National Flood Insurance Program and policyholders and appears to be confusing at best and unworkable at worst.
Lastly, H.R. 2246 would set up a process to supplant FEMA's Flood Insurance Rate Maps (FIRMs) with private or community flood maps. The bill would require the Technical Mapping Advisory Council (TMAC) to develop a set of standards, guidelines, and procedures that communities would use to develop alternative flood maps. It is unclear how this would improve on current law as FEMA already conducts extensive communication and outreach efforts with the community during the mapping process, including various minimum waiting periods, and consideration of any additional data that the community provides to improve the map. Moreover, today FIRMs cannot go into effect until a community adopts the map. H.R. 2246 would flip this process on its head, by requiring FEMA make the final certification. While this new process may advantage wealthier communities with the means to take on this-complicated and technical process, the bill does not provide any finding or technical assistance for lower-income communities that lack the resources to do so.