House Financial Services Committee Issues Testimony From R Street Institute
"Chairwoman Waters, Ranking Member McHenry and members of the committee,
"My name is
"The NFIP is a textbook example of unintended consequences. It was established to correct a market dislocation, by providing coverage that private insurers would not; to reduce the nation's reliance on post-hoc disaster assistance; to provide incentives for communities to invest in mitigation; and to be self-sustaining. It has not been self-sustaining, as the program has been forced to borrow nearly
"R Street is ideologically situated on the political right, but we long have prided ourselves on our willingness to form broad coalitions across the ideological spectrum that enable work with any policymaker or organization who shares our perspectives. In the area of flood insurance, this has been manifest in our status as a founding and active member of the
"Reviewing several of the draft bills the committee will consider, I am heartened that they make significant progress to address several of these priorities. I also hope to highlight a few areas where further reform would be appropriate.
AFFORDABILITY AND SUBSIDIES
"The most significant new element introduced in the discussion draft is the proposed demonstration project for means-tested discounted rates. I would like to commend the chairwoman, in particular, for her commitment to this issue. Addressing affordability has been a topic toward which members have paid quite a bit of lip service over the past 15 years, but this is the first substantial proposal to do exactly that.
"The bill's demonstration project would extend premium discounts to households making less than 80 percent of an area's median household income, with discounted rates that would be capped at 2 percent of annual area median income. Along with other members of the
"In looking at the draft bill, I have some concern that the premium caps may not be ideally structured to assist those who truly need it. While the 80 percent threshold may be appropriate in some communities, it may be necessary to add an upper income bound. For example, under this formula, in Loudon County,
"Among the reasons that a means-tested affordability program long has been needed is that the NFIP's existing policy subsidies, which
"The program's existing subsidies also flow from inland areas to coastal counties. As the
"Ensuring that lower-income policyholders are not burdened with unreasonably high rates is crucial to carrying out the goal of phasing out the NFIP's subsidies and grandfathering. The Homeowner and Flood Insurance Affordability Act of 2014 placed all subsidized properties on a glide path toward actuarial rates, with annual premium increases that are capped at 15 percent. That bill also specified that properties newly mapped into special flood hazard areas receive preferred risk policies for the first year, and then likewise see annual increases of up to 15 percent until actuarial rates are achieved. This prevents any future grandfathering.
"With the addition of an effective means-tested affordability program, such as the one proposed in the discussion draft, the committee should move forward with a plan to place on a glidepath the only cohort of properties currently scheduled to remain at below-full-risk rates: the pre-2014 grandfathered properties.
DEBT AND BORROWING AUTHORITY
"The discussion draft would forgive the entirety of the NFIP's
"It is not feasible that the NFIP will ever be able to repay its debt in full. Of the nearly
"The NFIP already has shown that there are fiscally responsible alternatives to taxpayer borrowing, with its successful transfer of more than
"While the
PRIVATE FLOOD AND HIGHER COVERAGE LIMITS
"The discussion draft would raise NFIP coverage limits from
"I am unaware of any evidence that residential or commercial policyholders currently face any notable affordability or availability issues in the market for excess flood coverage. In fact, the market for private flood insurance, including first-dollar coverage, has been growing rapidly. Based on the most recent statutory insurance filings, privately underwritten flood insurance grew by more than 50 percent from 2016 to 2017, from
"To the extent that members' concern is the impact of rising flood insurance rates being passed on in the form of higher rents, a more narrowly tailored provision raising coverage limits only for residential multi-family properties would address that issue more directly. Better still,
"It should be noted that excess flood coverage is separate from the question of privately written first-dollar coverage. With regard to private flood, we saw in last year's devastating floods caused by Hurricane Florence that just 9 percent of households in
"One additional step
"The NFIP remains the nation's primary source of flood insurance. But there is no reason to expand the program's coverage limits or otherwise crowd out private coverage that already serves consumers well. If we are to adapt to rising flood risks, both public and private resources will be needed.
FLOOD MAPPING
"We support the aims of the discussion draft on mapping, which would reauthorize the flood-mapping program and fund improvements to mapping technology, including the use of property-level Light Detection and Ranging (LIDAR) surveys. In a 2017 survey, the
"Improved mapping is therefore essential not only to the program's fiscal sustainability and its ability to charge risk-appropriate rates, but these improvements also are needed to ensure that homeowners, businesses and potential developers are not misled about the flood risks that properties are likely to face. I welcome the committee's commitment to invest in updated flood maps, though I have questions about some provisions of the draft legislation.
"In the section dealing with privacy requirements, the bill would prohibit the
"Separately, the bill lays out a process for LIDAR surveys to be employed in the removal of low-risk structures from flood hazard areas "en masse." Certainly, it is likely that updated maps will reveal some properties that are inappropriately designated under the old maps. However, it is striking that the bill does not contain a parallel provision laying out a process for the "en masse" inclusion of previously undesignated properties into flood hazard zones. A
BRINGING THE CBRS MODEL TO NFIP
"Finally, I wanted to offer for the committee's consideration a proposed reform intended to ease the process of adaptation to increased coastal flooding and tropical storms that we expect to face as a result of sea level rise and climate change. Over the next century, we may be forced to contemplate relocating potentially hundreds of thousands of Americans to higher ground, should the
"Toward that end, the NFIP should cease writing coverage for any new construction in 100-year floodplains. The approach would be modeled on the success of the Coastal Barrier Resources System (CBRS), a 37-year-old program that bars federal subsidies to development across a 3.5-million-acre zone of beaches, wetlands, barrier islands and estuaries along the
"Not only has the CBRS been successful in preserving fragile coastal habitats and ecosystems, but it has done so while actually saving taxpayer funds. According to a forthcoming study from researchers
"The study does not consider the cost of NFIP claims avoided due to the CBRS, but a stark example was provided by 2017's Hurricane Harvey. While Harvey's nearly
"This model of promoting conservation by removing federal subsidies has been adopted successfully elsewhere, including by several public insurance programs. The
"As with the CBRS, barring new construction in 100-year floodplains from NFIP eligibility would not foreclose the possibility that developers could find private insurers willing to sell coverage for an appropriate risk-based premium. It also would not relieve the challenges we will likely face in the years ahead with the stock of existing structures already in those zones. It would, however, apply the ancient wisdom of the Hippocratic Oath: "first, do no harm." Where we can cease encouraging development of flood-prone land, without laying any new burden on any current resident, it is an opportunity we simply must take.
"With that, I would be happy to answer any questions."
* * *
Footnotes:
1 https://www.downsizinggovernment.org/dhs/fema
2 http://www.livescience.com/18997-population-coastal-areas-infographic.html
3 https://www.gao.gov/assets/660/655734.pdf
4 https://www.insurancejournal.com/blogs/right-street/2018/03/18/483689.htm
5 https://www.mcclatchydc.com/news/nation-world/article218292160.html
7 https://www.bristol.ac.uk/news/2018/february/america-flood-risk.html
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