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FEMA’s NFIP Reform Legislative Proposals
The Federal Emergency Management Agency (FEMA) has submitted to the U.S. Senate a 104-page transmittal containing 17 legislative proposals to reform the National Flood Insurance Program (NFIP). First, the good news on the proposed reforms: • Renew the NFIP for a 10-year period (up to
September 30, 2031). • Cancel the NFIP’s $20 billion debt to the Federal
Treasury and eliminate interest on future NFIP debt. • Make changes in flood risk mapping and flood hazard information by expanding beyond just mapping, giving FEMA more flexibility to identify flood hazard and flood risk information and recognizing that maps are only one aspect of providing flood hazard information. Separate the regulatory requirements related to the identification of the Special Flood Hazard Areas from the delivery of non-regulatory flood hazard information in order to expedite the delivery of such information. • Increase the NFIP’s maximum coverage limits for structures and contents and index them to Fannie
Mae/Freddie Mac conforming loan limits (currently $647,200 for 1-4 unit residences) so that they can adjust periodically with housing costs. There would be coverage limitations for pre-FIRM structures, with coverage a bit more in “high cost areas” (Alaska,
Hawaii, Virgin Islands and Guam). FEMA would adjust the coverage amounts every 5 years to keep pace with future structure values; FEMA would not be allowed to decrease the coverage amounts. • Enable policyholders to purchase higher coverage limits to cover the cost of complying with floodplain management ordinances or laws. The
Increased Cost of Compliance Coverage (ICC), which is part of the current statutory cap on NFIP policy coverage, would be replaced with Flood
Compliance and Mitigation Coverage (FCM) of up to 20 percent of and in addition to the statutory coverage cap (an amount of $50,000 for residences, based on the current $250,000 cap). Additionally, FEMA would be allowed to pay the FCM loss up-front to policyholders, and policyholders would be allowed to assign their FCM claim for cost-share purposes for FEMA post-disaster grants to states and communities. • Establish a means-tested assistance program, including a three-to five-year pilot program, offering a graduated discount benefit to all current and potential policyholders, regardless of their mortgage status or flood zone, who have a household income at or below 120% of Area Median Income.
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• Require NFIP communities to establish specified minimum flood-risk reporting requirements for sellers and lessors before residential transactions close. Information would include: actual knowledge of flood damage to structures on the property; FEMA designation as a repetitive loss property; prior flood insurance claims (NFIP or private); Federal obligation to obtain and maintain flood insurance; flood risk as indicated by
FEMA’s flood hazard data; and availability and approximate cost of flood insurance. • Remove barriers to switching to private flood insurance policies. Allow private flood insurance coverage to satisfy any continuous coverage requirements imposed by the NFIP, and allow an individual to move to private flood insurance without the risk of losing premium discounts should they decide to return to NFIP flood insurance. To offset the cost of the above proposals, there are also the following proposals: • Decrease the NFIP’s borrowing authority to twothirds of total expected premiums in force in the following fiscal year, which will demark the 1-in20 occurrence exceedance loss level (currently $10.5 billion) as the upper limit of an event the
NFIP is capable of managing. Also, replace the Homeowner Flood Insurance Affordability Act Surcharge on NFIP flood insurance policies with an increase of the Reserve Fund Assessment on flood insurance policies (currently at 18% of the premium). If a flood event exceeds the 1-in20 occurrence exceedance loss level limit, then
FEMA will request Congress for an emergency supplemental appropriation. • Create separate classes for coastal versus inland flood zones in the NFIP’s rate tables, to acknowledge the differences between coastal and inland areas in both the frequency and severity of flooding due to velocity and wave action. • Use a building’s replacement cost value when assigning premium rates, thus reducing crosssubsidies of insurance rates and indicate to customers the true flood risk of their structures.
• Create a new category of Excessive Loss
Properties (XLPs), defined as structures with four or more paid losses of at least $10,000 each, and prevent FEMA from offering coverage for
XLPs. A property’s past claim/loss history would be “grandfathered” and not count towards the XLP status. Only qualifying losses after enactment of the statute would be considered. Structures made compliant with state and local floodplain management requirements would be allowed to drop the
XLP designation. Continued on next page
• Prohibit NFIP coverage for new construction in
Special Flood Hazard Areas (SFHAs) and new
NFIP polices for all non-residential commercial properties, regardless of flood zone. FEMA states the intent is to promote the growth of the private market by creating an inventory for new flood risk properties for which private insurance companies could compete. FEMA may temporarily make
NFIP insurance available in participating NFIP communities for newly constructed residential structures in SFHAs and non-residential commercial properties, if the state’s insurance regulator determines that affordable private flood insurance is not available. NFIP insurance would no longer be made available once affordable private insurance becomes available. • Codify and clarify the existing NFIP appeal authorities. Require policyholders to exhaust the
NFIP appeals process on denials or partial denials of claims prior to filing a lawsuit in federal court, and allow only 90 days after exhausting the appeals process to file suit. FEMA is allowed up to 365 days from receipt to make a determination on a policyholder’s appeal. So, FMA members may during the course of their work want to ask themselves some questions: • Are the proposed changes in flood risk mapping and flood hazard information going to result in less or more confusion for members of the public with non-technical backgrounds? • Are the proposed increases in NFIP policy and
FCM coverage sufficient for policyholders in high cost states like California and Hawaii?
• In addition to a graduated discount on flood insurance, should FEMA offer a monthly payment option for low- to moderate-income policyholders? • Would the proposed Federal disclosure requirements on NFIP communities have an adverse impact on CRS classifications for communities in states like California, which get
CRS credits for the state’s disclosure requirements? • Will the new 1-in-20 occurrence exceedance loss level limit on flood events and use of buildings’ replacement cost value in setting premiums put at a disadvantage high cost states like California and
Hawaii?
• Are the proposed new coastal area and XLP classifications going to place an undue burden on low-to moderate-income policyholders? Are
California policyholders going to be sooner classified as XLPs, due to the high cost of repair or reconstruction, even though the premiums
California policyholders pay out exceed the amount of claims FEMA has paid to California policyholders? Regarding the proposed prohibitions on NFIP flood insurance availability, what impact will the prohibitions have on low-to moderate-income policyholders in Special Flood Hazard Areas (SFHAs) and small businesses? Does the definition of “new construction” in SFHAs include work associated with substantial improvements or repair of substantial damage (SI/SD), or flood and other climate resiliency retrofits(seismic, fire, solar)? What about properties that become newly mapped into SFHAs during the course of already permitted construction? What happens to the policyholders if private companies decide to exit an area after entering it? Will the proposed prohibition on NFIP insurance availability encourage communities to employ more structural flood control measures to get more land out of SFHA designations? It will be very interesting to see how these NFIP reform proposals wend their way through Congress. Stay tuned!
