WASHINGTON, June 8 — The House Financial Services Subcommittee on Housing, Community Development and Insurance issued the next testimony by Reinsurance Association President Frank Nutter involving a hybrid listening to on May 25, 2022, entitled “Reauthorization and Reform of the National Flood Insurance Program”:
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Thank you for the chance to testify throughout at this time’s listening to on “Reauthorization and Reform of the National Flood Insurance Program,” and thanks on your curiosity within the U.S. property casualty (re)insurance coverage business.
I’m Frank Nutter, President of the Reinsurance Association of America (RAA). The RAA is the main commerce affiliation of property and casualty reinsurers doing enterprise in the United States. RAA membership is numerous, together with reinsurance underwriters and intermediaries licensed within the U.S. and people who conduct enterprise on a cross border foundation. The RAA additionally has life reinsurance associates and insurance-linked securities (ILS) fund managers and market members which are engaged within the assumption of property/casualty dangers. The RAA represents its members earlier than state, federal and worldwide our bodies.
The RAA appreciates the Committee beginning a proper dialog on reauthorization and reform of the NFIP. The RAA helps a long-term reauthorization of the NFIP and reforms, particularly people who:
* Strengthen NFIP’s monetary framework and resiliency,
* Facilitate the event of a personal flood insurance coverage market,
* Close the flood insurance coverage safety hole, and
* Create resilient and insurable communities.
Introduction
A tenet of the Federal authorities’s pure catastrophe coverage ought to be to guard U.S. taxpayers by managing the nation’s escalating pure catastrophe dangers, lowering these dangers over the long-term, and selling environmental stewardship. The NFIP was established on the essentially sound rules of encouraging pure catastrophe mitigation and selling using insurance coverage to cut back publish occasion catastrophe help. In 1973, George Bernstein, the primary Federal Insurance and NFIP Administrator, cautioned prophetically: “It is the combination of land use controls and full actuarial rates for new construction that makes the National Flood Insurance Program an insurance program rather than a reckless and unjustifiable giveaway program that could impose an enormous burden on the vast majority of the Nation’s taxpayers without giving them anything in return.” For many years, Bernstein’s warning was ignored, and at this time the NFIP stays on the U.S. Government Accountability’s (GAO) “High Risk List,” the place it has been since 2006./1
As of FEMA’s most up-to-date NFIP monetary assertion, the Program is $20.5 billion in debt.2 According to the newest GAO report that examined NFIP insurance policies with sponsored charges, 17% remained sponsored and round 9% have been receiving grandfathered charges, which means that “property owners whose properties are remapped into higher-risk flood zones… continue to pay the premium rate from the lower-risk zone.”3 GAO additionally anticipates a rise within the frequency and severity of floods, the variety of catastrophic floods, and the variety of repetitive loss properties, the latter of which accounted for $22.2 billion (32%) of the $69.7 billion in claims paid by NFIP from 1978 to 2019./4
Subsidized charges have been launched early within the Program as an inducement for communities to enter the Program. It was a profitable technique. Nearly 22,000 communities now take part. However, it was the intent of the unique laws that sponsored charges and the properties to which they apply would to be regularly eradicated. For many years, charges within the NFIP have been sponsored with out regard to the current character or possession of the property. Additionally, the Program initially was designed to handle main residences, but second houses, funding, and trip properties obtained the good thing about sponsored charges for many years. Congress ought to acknowledge that sponsored charges and statutory caps on charges could also be standard with beneficiaries, however sponsored charges and caps distort threat evaluation by builders, native officers, property patrons and NFIP policyholders. They enhance the cross subsidy from low or no threat individuals and taxpayers to these dwelling in high-risk flood areas. The traditional “robbing Peter to pay Paul” analogy applies. The Program’s subsidies even have facilitated the event of environmentally delicate coastal areas, together with these at excessive threat to flood losses.
For the primary 4 many years of this system, NFIP was modified by legislative compromises, somewhat than sound public coverage, insurance coverage rules and practices. Congress and FEMA ought to be counseled, nonetheless, for not too long ago taking steps to handle these basic flaws within the NFIP and towards eradicating inequitable and unjustifiable fee subsidies. As a consequence, the NFIP is at this time on a path towards a stronger monetary framework and resiliency to pay claims with out further borrowing from taxpayers. The RAA urges Congress to keep away from retreating from this progress and strongly encourages Congress to completely look at reforms that may enhance this system to the good thing about these with houses, companies, and communities going through flood threat and taxpayers alike.
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1 https://www.gao.gov/high-risk-list; https://www.gao.gov/highrisk/national-flood-insurance-program
2 https://www.fema.gov/sites/default/files/documents/fema_fy2022-q1-watermark.pdf
3 https://www.gao.gov/assets/gao-20-508.pdf
4 https://www.gao.gov/assets/gao-20-508.pdf
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Strengthen NFIP’s Financial Framework and Resiliency
As it at the moment operates, the NFIP is just not an insurance coverage program. But it ought to and may be, and due to the “National Flood Insurance Program Extension Act” (NFIP Extension Act) and the “Biggert-Waters Flood Insurance Reform Act of 2012” (Biggert-Waters), it’s on a path towards changing into an insurance coverage program.5 That laws launched personal sector threat evaluation into the NFIP therein retaining the correct function for presidency in land use planning and hazard mitigation and re-establishing the flood threat administration program as a public-private partnership. FEMA’s implementation, during the last decade, of the NFIP Extension Act, Biggert-Waters, and the “Homeowner Flood Insurance Affordability Act of 2014 (HFIAA),” launched fuller utility of risk-based charges and an acceptable risk-bearing function for the personal reinsurance sector, which have began to rework the NFIP. Specifically, FEMA improved NFIP’s monetary framework and resiliency by efficiently establishing the NFIP Reinsurance Program and updating the NFIP’s threat score methodology by the implementation of Risk Rating 2.0 (RR 2.0), a brand new pricing methodology. Future flood reform laws, at a minimal, ought to protect and help these initiatives to proceed to strengthen NFIP’s monetary framework and resiliency in order that it may possibly pay claims, particularly after catastrophic occasions. By persevering with down this path, the NFIP might obtain the purpose of defending taxpayers and the Treasury, thereby returning the Program to its unique purpose of being fiscally sound.
Reinsurance
Background. Reinsurance is actually insurance coverage for insurance coverage firms. It is a profitable, vital, and environment friendly threat administration device utilized by personal sector firms and authorities applications to offer an important security internet for low frequency, excessive severity pure and man-made occasions that end in excessive insured losses. Reinsurance helps the personal sector firms and authorities applications enhance capability and monetary efficiency, improve monetary safety, and scale back monetary volatility. Insurers depend on reinsurers to imagine losses for a single occasion or, in lots of circumstances, for an accumulation of losses from hurricanes, earthquakes, winter storms, wildfires, or terrorist assaults. Some historic occasions illustrate this. Hurricanes Katrina, Rita and Wilma in 2005 brought about over $92 billion in insured losses, and reinsurers bore round 28% of the losses from these occasions.6 Reinsurers assumed 55% of $41 billion in insured losses from the terrorist occasions of September 11.7 Superstorm Sandy brought about $25 billion in insured losses with reinsurers taking 30% of these losses.8 Reinsurance is also the first mechanism for spreading threat globally, thereby accessing a better pool of capital to pay for inevitable catastrophic losses. Reinsurance is extensively utilized by the personal markets to diversify threat and defend towards future losses. Reinsurance is bought for primarily 4 causes: (1) to restrict legal responsibility on particular dangers; (2) to stabilize loss expertise; (3) to guard towards catastrophes; and (4) to extend capability. Depending on the purchaser’s objectives, various kinds of reinsurance contracts can be found to deliver in regards to the desired consequence.
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5 Public Law No: 112-123, https://www.congress.gov/112/plaws/publ123/PLAW-112publ123.pdf; Public Law 112-141, https://www.congress.gov/112/plaws/publ141/PLAW-112publ141.pdf
6 Holborn Corporation, “Holborn Perspectives, Looking Closer At…SuperStorm Sandy,” December 12, 2012
7 Holborn Corporation, “Holborn Perspectives, Looking Closer At…SuperStorm Sandy,” December 12, 2012
8 Holborn Corporation, “Holborn Perspectives, Looking Closer At…SuperStorm Sandy,” December 12, 2012
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For Federal applications, buying reinsurance can mitigate the monetary affect of any large-scale future losses and assist to forestall any future funding lags as it’s pre-arranged financing for losses. Reinsurance additionally permits Federal applications to realize monetary flexibility and never be pressured to depend on emergency Federal funding within the occasion of defaults that would put applications in jeopardy. Reinsurance has been utilized by Federal applications, together with FEMA’s NFIP, the Export-Import Bank of the U.S., and the Government Sponsored Enterprises, Fannie Mae and Freddie Mac. It additionally has been utilized by state applications, together with the California Earthquake Authority, California Wildfire Fund, Florida Hurricane Catastrophe Fund, and Florida Citizens Property Insurance Corporation.
Consistent with the intent of Congress, reinsurers imagine the personal sector can and will voluntarily assume extra Federal authorities threat and assist handle publicity to losses. The use of personal capital will defend customers, taxpayers, and communities, whereas spreading threat all through the globe to insurers and different capital suppliers who’re prepared to imagine such threat. Risk switch through reinsurance and the capital markets will strengthen authorities applications by giving them the monetary flexibility to make sure they proceed to stay viable in the long run. Reinsurers are poised to work with the Congress and the Administration to develop and maximize the Federal authorities’s utilization of the personal market to the extent the business can write the chance.
FEMA’s NFIP Reinsurance Program. The RAA helps FEMA’s NFIP Reinsurance Program and requests that or not it’s preserved in NFIP reauthorization and reform laws.9 The RAA has lengthy advocated for the NFIP to make the most of the personal market to assist handle the monetary burden of the NFIP’s catastrophic flood threat. The NFIP Reinsurance Program has efficiently enlisted personal reinsurance and capital, which has strengthened the NFIP’s resilience and talent to pay policyholder claims after catastrophic floods and helped to guard taxpayers towards NFIP losses following an excessive flooding occasion. The good thing about the NFIP Reinsurance Program was evident when over $1 billion in reinsurance was recovered by FEMA to pay claims ensuing from Hurricane Harvey in 2017 (further particulars under). In 2022, for the sixth consecutive 12 months, FEMA efficiently administered its NFIP Reinsurance Program that transfers threat from the NFIP to the capital markets, particularly by reinsurance placements and disaster bond issuances.
As famous above, a number of Federal authorities companies have already got threat switch applications in place. These applications spotlight the methods by which threat switch can succeed for presidency companies. The greatest instance of an ongoing Federal threat switch program is FEMA’s NFIP Reinsurance Program. The NFIP Reinsurance Program allows the NFIP to make the most of the personal market to assist handle the monetary burden of the NFIP’s catastrophic flood threat by offering monetary backing for the federal government’s flood threat, defending taxpayers, and serving to this system to be extra resilient and pay claims. In 2016, FEMA, launched its NFIP Reinsurance Program through a pilot and, in 2017, transferred $1.042 billion of the NFIP’s monetary threat to 25 reinsurers, offsetting a few of NFIP’s threat to the personal sector as a substitute of U.S. taxpayers. In this system’s first 12 months (2017), FEMA collected the total $1.042 billion from the personal reinsurance sector to assist pay the price of NFIP losses and claims ensuing from Hurricane Harvey. This 2017 protection, which additionally improved NFIP’s monetary viability and guarded taxpayers, value $150 million, and this system efficiently renewed the following 12 months. This is a real testomony of profitable personal public partnerships. Following the 2017 placement, this system was renewed and at the moment has reinsurance protection by 2025. For FEMA’s conventional reinsurance placements from 2017 by February 2022 and capital market reinsurance placements from 2018 by February 2022, FEMA paid a complete of $1.75 billion in premium to reinsurers and the capital markets, obtained $1.042 billion from reinsurers as beforehand talked about, and has as much as $2.664 billion obtainable to gather after a qualifying 2022 loss occasion.10 The preliminary 2017 buy marked key first steps in the direction of serving to the NFIP obtain long run resilience and monetary stability and was essential in enabling the reinsurance program to be a long-term challenge.
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9 https://www.fema.gov/flood-insurance/work-with-nfip/reinsurance
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The RAA additionally helps H.R. 3417, the “Taxpayer Exposure Mitigation Act,” launched by Representative Blaine Luetkemeyer (R-MO), which “requires FEMA to purchase reinsurance or some capital market alternative to protect taxpayers from footing the bill for future losses.”11 The invoice enhances the NFIP Reinsurance Program and contains vital elements for FEMA to think about as a part of threat switch.
Risk-Based Pricing
After enactment of the NFIP Extension Act, Biggert-Waters, and the HFIAA, FEMA undertook a course of to higher defend taxpayers and handle the nation’s escalating threat of flooding by bettering its threat score methodology. As said on its web site, “FEMA is updating the National Flood Insurance Program’s (NFIP) risk rating methodology through the implementation of a new pricing methodology called Risk Rating 2.0. The methodology leverages industry best practices and cutting-edge technology to enable FEMA to deliver rates that are actuarily sound, equitable, easier to understand and better reflect a property’s flood risk.”12 The RAA strongly helps RR 2.0, which might extra exactly mirror the actual threat of flooding of properties with extra superior actuarial instruments and disaster fashions.
Key Takeaways from FEMA’s Public NFIP Data. FEMA publicly launched knowledge on the affect of RR 2.0 on present NFIP insurance policies for the primary 12 months of its implementation. Based on this knowledge, the RAA developed an analytical device to know the information and RR 2.0’s potential affect on NFIP policyholders. Separately, FEMA publicly launched common, historic NFIP knowledge, and RAA is creating a separate analytical device to know that knowledge. FEMA’s knowledge has supplied quite a lot of insights in regards to the enhancements RR 2.0 revamped the earlier NFIP threat score methodology.
For context, NFIP offers flood insurance coverage to round 5 million policyholders. Of these, round 3.4 million (67%) are insurance policies for single household houses, together with main residences, second houses and trip properties, in addition to dwelling contents. Around 1.6 million (33%) are insurance policies for business, multifamily, and different constructions. FEMA’s publicly obtainable RR 2.0 knowledge typically distinguishes between single household insurance policies and all different insurance policies and is supplied at a zip-code degree. FEMA has not publicly launched extra granular knowledge to differentiate amongst single household insurance policies – main residences, second houses, trip properties, and dwelling contents.
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10 https://www.fema.gov/press-release/20220223/fema-expands-its-reinsurance-program-transfers-450-million-flood-risk; https://www.fema.gov/flood-insurance/work-with-nfip/reinsurance; https://www.fema.gov/sites/default/files/documents/fema_fy-2021-q4-watermark.pdf; https://www.fema.gov/sites/default/files/2020-05/FIMA_Watermark_FY19Q4.pdf; https://www.fema.gov/sites/default/files/2020-05/fima-watermark-2018-q4.pdf; https://www.fema.gov/sites/default/files/documents/fema_fy2022-q1-watermark.pdf
11 https://luetkemeyer.house.gov/news/documentsingle.aspx?DocumentID=400530
12 https://www.fema.gov/flood-insurance/risk-rating
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FEMA’s knowledge demonstrates that round 1.1 million (23%) of NFIP policyholders’ premiums are anticipated to lower within the first 12 months underneath RR 2.0, which to our data, has by no means occurred in the course of the NFIP’s historical past and wouldn’t have occurred underneath FEMA’s earlier pricing methodology. Under FEMA’s pricing methodology that preceded RR 2.0, all NFIP policyholders’ premiums have been scheduled to extend. As a results of RR 2.0, 23% of NFIP policyholders collectively are scheduled to save lots of an estimated $41 million. Under RR 2.0, round 66% of NFIP policyholders’ premiums will stay secure, which means that they are going to haven’t any enhance ($0.00) or a rise of as much as $10 per 30 days. In complete, round 89% of NFIP insurance policies will see a lower of their premium or have a secure premium, as in comparison with the 100% of NFIP policyholders’ premiums that have been scheduled to extend underneath FEMA’s earlier pricing methodology.
Under RR 2.0, as was the case underneath FEMA’s earlier pricing methodology, some policyholders’ premiums for single household residences will enhance. Specifically, round 7% of policyholders’ premiums for single household residences will enhance by a modest quantity, $10 to $20 per 30 days. And round 4% of policyholders’ premiums for single household residences will enhance by a big quantity, $20 or extra per 30 days.
To higher perceive the affect of decreases and will increase to policyholders’ premiums for single household residences, the RAA carried out an evaluation of FEMA’s RR 2.0 knowledge towards earnings knowledge derived from the “American Community Survey” (ACS) by the U.S. Census Bureau, U.S. Department of Commerce.13 The outcomes of this evaluation conclude that:
* There are round 495,000 NFIP single household residence insurance policies positioned in low to moderate-income zip codes for which premiums will lower underneath RR 2.0. These insurance policies signify round 15% of all NFIP single household residence insurance policies. Of all NFIP single household residence insurance policies, round 100,000 are in low to moderate-income zip codes and have premiums which are scheduled to lower by $100 or extra per 30 days. As famous above, 0% of policyholders’ premiums would have decreased underneath FEMA’s earlier pricing methodology.
* There are round 78,000 NFIP single household residence insurance policies positioned in low to moderate-income zip codes for which premiums will enhance by a big quantity ($20 or extra per 30 days). These insurance policies signify round 2.97% of all NFIP single household residence insurance policies, that are fewer than the roughly 3.32% of all NFIP single household residence insurance policies positioned in low to moderate-income zip codes for which premiums would have elevated by a big quantity underneath FEMA’s earlier pricing methodology. Of all NFIP single household residence insurance policies, round 300 are positioned in low to moderate-income zip codes and have premiums which are scheduled to extend by $100 or extra per 30 days.
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13 The RAA’s analytical device price-parity-adjusted ACS earnings knowledge utilizing value parity elements from the U.S. Department of Commerce, Bureau of Economic Analysis. As beforehand famous, FEMA’s knowledge on insurance policies for single household residences doesn’t distinguish amongst main residences, second houses and trip properties, and dwelling contents. The RAA preliminarily estimated, with point-in-time, common NFIP knowledge and separate and former to RR 2.0 – that 38% of NFIP single household residence insurance policies are non-primary residences.
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Appendix A features a distribution of RR 2.0 premium adjustments by single household coverage depend and estimated premium quantities underneath RR 2.0, and it additionally categorizes adjustments by zip code degree median family earnings.
Affordability. Separately, the RAA has confirmed with FEMA that underneath the present RR 2.0 pricing methodology, the utmost annual premium quantity for a single household residence coverage for 2022 is $12,125. Under FEMA’s earlier pricing methodology, the utmost any NFIP single household policyholder paid was $45,925.14 In addition, it ought to be famous that single household residence insurance policies which are main residences will proceed to be topic to the 18% statutory cap on annual fee will increase, which Congress enacted as a part of the “Homeowner Flood Insurance Affordability Act of 2014 (HFIAA).” That annual cap applies until these constructions are deemed extreme repetitive loss properties. That stated, the RAA acknowledges that it could be difficult for some NFIP policyholders confronted with vital flood threat to pay their flood insurance coverage premiums and gives its help to Members of Congress to assist develop focused, need-based options for particular person policyholders and, in some circumstances, a neighborhood of policyholders. The RAA has a broader proposal, mentioned under, to make use of a data-driven method to determine communities which are probably the most in want and most vulnerable to pure disasters, particularly these which are vulnerable to flooding, and prioritizing and directing public funding and personal sector investments to enhance resilience in these communities.
According to FEMA, “The goal of Risk Rating 2.0 is to deliver easy-to-understand premiums that are distributed more equitably across all policyholders based on the replacement cost value of their home and their property’s unique flood risk.”15 In different phrases, FEMA’s earlier pricing methodology did not consider property-specific substitute value worth and property-specific flood threat, so some policyholders have been overpaying for his or her NFIP flood insurance coverage. FEMA launched knowledge evaluating RR 2.0 to its earlier pricing methodology, and the RAA’s evaluation of that knowledge (Appendix B, Single Family NFIP Policies) clearly demonstrates that, underneath RR 2.0, increased premium will increase are attaching on common to increased worth properties. But, if the earlier pricing methodology remained in place, increased premium will increase can be attaching on common to decrease worth properties. FEMA’s knowledge demonstrates that its RR 2.0 pricing methodology is extra equitable, particularly for policyholders with low-value properties. A latest NPR article additionally described this RR 2.0 affect for choose neighborhoods within the Philadelphia, Pennsylvania space.16 Build for Future Disasters. The RAA helps bipartisan laws, the “Build for Future Disasters Act of 2021” (H.R. 2632), launched by Representatives Scott Peters (D-CA) and Andy Barr (R-KY), “…to end the costly cycle of building, flooding, and rebuilding perpetuated by the NFIP. The Build for Future Disasters Act would end NFIP subsidies for newly-constructed properties in areas vulnerable to flooding. Properties built in 2025 and thereafter would be subject to rates that reflect up-to-date flood risk information. These new constructions would not qualify for a subsidy, while structures built before 2025 in flood zones or re-mapped into flood zones would still be eligible for grandfathering subsidies. The bill also requires the U.S. Government Accountability Office to study the feasibility and implications of lowering all subsidies to a point that puts the NFIP on a path to stronger financial footing. Together, this would reduce taxpayer burden, stop growing government risk, and quash the implication the risk must be low if insurance is cheap.”17 The RAA applauds Reps. Peters and Barr for recognizing that the vicious cycle of build-flood-rebuild is just not in one of the best pursuits of the NFIP, nor the American taxpayers who’re finally on the hook for the prices related to this system.
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14 https://www.nahb.org/-/media/NAHB/advocacy/docs/top-priorities/flood/risk-rating-fact-sheet.pdf
15 https://www.fema.gov/sites/default/files/documents/fema_nfip-flood-insurance-manual-sections-1-6_oct2021.pdf
16 https://whyy.org/articles/flood-prone-eastwick-federal-flood-insurance-pricing-system/
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Unfortunately, one of many draft payments into consideration, as a part of at this time’s listening to, would “limit the annual increases in premiums and surcharges under [NFIP].”18 The draft invoice would get rid of “catastrophic loss years” as a part of the calculation of an “average historical loss year” as a part of FEMA’s methodology to find out charges for NFIP insurance policies. The similar draft invoice reduces the present 18% cap to 9% for the utmost allowable value enhance (to incorporate chargeable premiums, surcharges, and charges) for any particular person coverage, no matter a policyholder’s earnings degree. This change would end in an instantaneous discount within the scheduled premium will increase for second houses, trip houses, and funding, enterprise, and different business properties, Severe Repetitive Loss properties, mis-rated and lapsed insurance policies, and insurance policies the place a proposal of mitigation help has been refused by the proprietor. The RAA opposes this draft invoice in its present type.
Facilitate Development of a Private Flood Insurance Market
Flood reform laws ought to facilitate the event of a personal flood insurance coverage market with the NFIP risk-based pricing reforms talked about above, by eradicating impediments to shopper selection, and by rising flood insurance coverage choices for customers.
Removing Impediments to Consumer Choice. Flood insurance coverage uncertainty for customers, because it pertains to steady protection and potential fee will increase by the NFIP, is an obstacle to customers shopping for personal flood insurance coverage and limits customers’ decisions. Insurance brokers and brokers have said that “…the risk of a substantial NFIP rate increase should the consumer later wish to return to the NFIP often makes insurance agents and brokers hesitant to recommend private flood insurance policies.”19 It is vital that Congress and FEMA present customers with readability about steady protection compliance in order that present and future NFIP policyholders are assured that they’ve complied with the legislation’s steady protection necessities by having an NFIP or personal flood insurance coverage coverage. For instance, if a shopper leaves the NFIP to safe a personal flood coverage with higher protection and a greater value and later re-assumes an NFIP coverage, as long as the buyer had steady protection, that NFIP coverage ought to be on the similar fee and phrases as if the buyer had repeatedly maintained an NFIP coverage.
The RAA helps H.R. 4699 launched by Representatives Kathy Castor (D-FL) and Blaine Luetkemeyer (R-MO) to amend the National Flood Insurance Act of 1968 (NFIA) to “consider any period during which a property was continuously covered by private flood insurance to be a period of continuous coverage, including for the purposes of NFIP subsidies.”20 In two earlier Congresses, comparable laws had broad bipartisan help. In 2016, by a vote of 419-0, the House handed the same provision as a part of H.R. 2901 and, in 2017, by a vote of 58-0, the House Financial Services Committee handed the same provision as a part of H.R. 1422.
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17 https://scottpeters.house.gov/media-center/press-releases/reps-peters-barr-reintroduce-bipartisan-bill-to-discourage-costly; https://barr.house.gov/2021/4/reps-barr-peters-reintroduce-bipartisan-bill-to-discourage-costly-development-in-flood-prone-areas
18 https://financialservices.house.gov/uploadedfiles/bills-117pih-nfipratecap.pdf
19 https://financialservices.house.gov/uploadedfiles/hhrg-116-ba00-wstate-heidrickc-20190313.pdf
20 https://www.congress.gov/bill/117th-congress/house-bill/4699/text?q=%7B%22search%22%3A%5B%22%22%5D%7D&r=7&s=1
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Increasing Flood Insurance Options for Consumers. Congress ought to modernize the a part of the National Flood Insurance Act (NFIA) that has not been used or up to date in over 40 years to provide FEMA further instruments to encourage further personal market participation, together with capital, in providing flood insurance coverage, which might profit customers and taxpayers.
When enacted in 1968, over 50 years in the past, the NFIA included two approaches to offer customers with flood insurance coverage, Part A and Part B. The NFIP operates underneath Part B with the Federal authorities assuming the total underwriting threat topic to the chance switch program talked about above. Congress ought to modernize Part A of the NFIA and make clear that FEMA can use its authorities concurrently with the Part B program. Re-purposing and modernizing the statutory language in Part A would give FEMA further instruments to companion with personal insurers, facilitate the participation of personal insurers in NFIP on a risk-sharing foundation, additional enhance NFIP’s viability, enhance the NFIP’s assets to pay claims, and enhance flood insurance coverage alternatives for customers. Part A reforms can also result in a stronger public-private partnership, give personal insurers expertise in underwriting flood threat, and assist shut the flood insurance coverage protection hole.
The Part A statutory language at the moment authorizes the FEMA Administrator to facilitate and help the creation of a pool of insurers on a threat sharing foundation with the federal authorities to offer flood insurance coverage by their community of brokers and policyholder relationships. Under the statute, the Administrator defines the {qualifications} of insurers for the pool and threat capital to be supplied. The Administrator is allowed to enter a contractual relationship with the pool defining the insured threat to be retained and the federal government’s threat by its reinsurance of the pool. Pursuant to the statute, the monetary association acknowledges that the NFIP offers subsidies to sure policyholders.
The RAA particularly recommends that NFIP reauthorization and reform laws embrace the modification supplied to the “National Flood Insurance Program Reauthorization Act of 2019” after which withdrawn by Representative Blaine Luetkemeyer (R-MO) in the course of the House Financial Services Committee’s June 11-12, 2019 mark up.21 The modification language would: (1) require FEMA to solicit concepts for risk-sharing demonstration applications; (2) present FEMA with authority, however not require it, to conduct risk-sharing demonstration applications; and (3) make technical amendments to the NFIA Part A authority, which FEMA can use for risk-sharing demonstration applications.
Close the Flood Insurance Protection Gap
Homeowners and renters, property homeowners, mortgage traders, taxpayers, and communities face dangers on account of pure catastrophe dangers and the dearth of insurance coverage protection or underinsurance of such protection. There is a severe and vital pure catastrophe insurance coverage safety hole within the U.S. The Department of the Treasury’s Federal Insurance Office’s (FIO) Federal Advisory Committee on Insurance (FACI) has a subcommittee devoted to addressing it. Several RAA members serve on each the FACI and the “Subcommittee on Addressing the Protection Gap through Public-Private Partnerships and Other Mechanisms.” During FACI’s December 2019 assembly, the Subcommittee cited statistics to offer examples of the insurance coverage safety hole within the U.S. and issued suggestions that FHFA ought to take into account.22 The National Association of Insurance Commissioners (NAIC) has revealed alarming statistics in regards to the catastrophe insurance coverage safety hole. For instance, one NAIC statistic cited within the Subcommittee’s presentation is that “Only 1% of properties outside of flood zones have flood insurance, yet half of U.S. floods occur in these areas.” Various research and experiences, together with a 2018 report by AIR Worldwide (now Verisk), have warned that the subsequent large earthquake to affect California, seemingly by 2044, might end in $170 billion in complete injury and virtually half can be residential-related loss, $37 billion of which might be uninsured.23 Given the chance of future, vital, and dear pure disasters all through the U.S. and uninsured residential prices, you will need to have a coordinated effort specializing in closing the insurance coverage safety hole.
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21 https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407747; https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=403829
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Congress, the Administration, the NAIC, state and native officers, and the personal sector, together with reinsurers, ought to develop a complete technique to determine and deal with the pure catastrophe insurance coverage safety hole within the U.S. and the dangers it poses to householders and renters, property homeowners, people, companies, and federal applications and taxpayers. It is also vital to shut the insurance coverage safety hole. Congress and Federal regulators ought to assist provoke efforts to shut the insurance coverage safety hole through conventional insurance coverage and threat switch. Congress and Federal regulators can additional facilitate a personal marketplace for flood insurance coverage, doubtlessly offering customers with extra flood insurance coverage choices. One strategy to obtain that is for the Federal Housing Finance Agency (FHFA) and HUD’s Federal Housing Administration (FHA) to align their laws and/or steerage for personal flood insurance coverage with these issued in 2019 by Federal lending regulators.24 (In 2020, HUD issued a proposed regulation to align its FHA laws and steerage with that of the 2019 Federal lending regulators, however HUD has not issued its closing regulation).25
Primary Insurance
Traditional insurance coverage options – comparable to main property insurance coverage safety, together with flood insurance coverage – are vital for individuals, property, jobs, companies, and communities to be resilient within the aftermath of pure disasters. That is very true since Federal catastrophe help is supplied solely when there’s a Federally declared catastrophe and usually leads to a fraction of what insurance coverage help can present. For instance, in response to FEMA, the typical, annual flood insurance coverage premium was $700 (about $58 per 30 days) in 2019, and the typical declare payout was $53,000.26 Meanwhile, in 2019, Federal catastrophe help was capped at $34,900 with a median annual cost of $6,246.27 Ensuring that the safety hole is bridged, and property insurance coverage adequately covers the local weather and pure catastrophe threat(s) concerned are of utmost significance. Risk switch merchandise that defend every stakeholder from pure catastrophe dangers can play an vital function.
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22 https://home.treasury.gov/system/files/311/December2019FACI_ProtectionGapPresentation.pdf; https://home.treasury.gov/system/files/311/December2019FACI_ProtectionGapProposedRecs.pdf
23 https://www.air-worldwide.com/Publications/Infographics/Who-Will-Pay-for-the-Next-Great-California-Earthquake-/
24 https://www.fdic.gov/news/financial-institution-letters/2019/fil19008.html
25 https://www.federalregister.gov/documents/2020/11/23/2020-25105/acceptance-of-private-flood-insurance-for-fha-insured-mortgages; https://www.hud.gov/press/press_releases_media_advisories/HUD_No_20_191
26 https://www.fema.gov/data-visualization/historical-flood-risk-and-costs
27 https://www.federalregister.gov/documents/2018/10/22/2018-22884/notice-of-maximum-amount-of-assistance-under-the-individuals-and-households-program; FEMA communication with RAA, 4/16/2021
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Create Resilient and Insurable Communities
People and communities throughout the U.S. depend on each public insurance coverage applications and personal insurance coverage protection. If little is finished to mitigate or pre-mitigate the publicity of those individuals and communities to pure catastrophe dangers, particularly excessive climate dangers, the U.S. will ultimately develop uninsurable communities, and other people and communities can be reliant upon catastrophe help from the Federal authorities, which has largely been confirmed to be insufficient to assist individuals absolutely get well. As the severity and frequency of pure disasters proceed to extend, the RAA believes quite a lot of options ought to be used to enhance neighborhood resilience to the good thing about all these within the worth chain of pure catastrophe threat publicity.
Some conventional options, like property insurance coverage protections for householders as described above actually can and ought to be utilized, however new analytical capabilities that more and more and intelligently will help scale back threat and prioritize and direct private and non-private sector assets to attaining that purpose additionally ought to be pursued.
In December 2019, the National Institute of Building Sciences issued its U.S. Department of Housing and Urban Development-funded “Natural Hazard Mitigation Saves” report.28 The report describes that federal catastrophe mitigation has saved $6 for each $1 invested since 1995. Other mitigation-related actions, comparable to updating constructing codes to make sure resilient constructions, and investments can save between $4 and $11 for each $1 spent. Investing in mitigation can scale back the affect of future disasters on lives, property, and the financial system. Congress and the Administration can enhance these investments by directing each public and incentivizing personal sector assets to help resilience initiatives.
Community Disaster Resilience Zones. The RAA has developed one other analytical device, largely based mostly on FEMA’s National Risk Index for Natural Hazards (NRI) knowledge, and its complete Community Disaster Resilience Zones, or CDRZ, proposal to make use of a data-driven method to direct public and incentivize personal sector funding to enhance resilience, together with reasonably priced housing resilience, in probably the most in want and most in danger communities going through vital pure catastrophe threat(s), together with the chance of flooding. The Community Disaster Resilience Zones (CDRZ) Act of 2022 (S. 3875/H.R. 7242), the primary bipartisan and bicameral payments of the proposal have been launched in March and voted on and superior, with no opposition, by the U.S. Senate and House Committees of jurisdiction in March and April, respectively, to the total chambers for debate and a vote. The CDRZ Act of 2022 would amend the 1988 “Robert T. Stafford Disaster Relief and Emergency Assistance Act” to ascertain a statutory construction to determine and designate CDRZ communities which are probably the most in want and most in danger to pure disasters, comparable to hurricanes, flooding, earthquakes, and wildfires, to extend private and non-private sector investments in housing, infrastructure, and community-wide resilience. The invoice is supported by a various, RAA-led coalition of 30 nationwide organizations. The RAA wish to work with this Committee and different Committees in Congress on further CDRZ-related laws, and with key Federal companies to direct public funds and personal sector funding to initiatives that enhance resilience in weak communities.
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28 https://www.nibs.org/projects/natural-hazard-mitigation-saves-2019-report
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Additional Reform Priorities. FEMA’s Flood Mitigation Assistance (FMA) Program and Building Resilient Infrastructure and Communities (BRIC) program, U.S. Department of Housing and Urban Development applications, the U.S. Department of the Treasury’s Capital Magnet Fund, and different Federal applications ought to direct funding assets towards attaining housing and pure catastrophe resilience for “extremely low- and very low-income households” that face vital pure catastrophe threat and that expose taxpayer-backed Federal housing applications to pure catastrophe dangers.29 In common, the RAA additionally recommends that the Financial Stability Oversight Council (FSOC) and all of its members prioritize pure catastrophe resilience efforts for federally funded and federally backed residential properties in communities which are probably the most in want and most in danger from vital pure catastrophe(s).
The RAA additionally helps utilizing financing mechanisms and the tax code to leverage Federal spending and supply states, communities, householders, and companies with incentives to enhance constructing resilience and higher defend towards the pure catastrophe dangers they face, together with:
* As a part of its CDRZ proposal (typically described above), to assist fund resilience initiatives in or primarily benefitting CDRZ communities, laws to create Federal:
* Taxable direct pay bonds, federally sponsored bonds issued by state and native governments for native initiatives that help neighborhood resilience,
* Tax-exempt facility personal exercise bonds, federally tax-exempt bonds from which proceeds can be utilized by personal or quasi-governmental entities to fund resilience initiatives that profit a public objective,
* Transferrable tax credit for people for resilience enhancements to housing,
* Tax credit for charitable contributions for resilience initiatives, and
* Tax credit for community-level initiatives which are tradeable, transferrable, and don’t expire, and permit proceeds from the sale of licensed tax credit for use to, for instance, meet matching necessities for federally funded resilience initiatives.
* The “Protecting Families and the Solvency of the National Flood Insurance Program Act of 2022” (H.R. 7842) to “…authorize FEMA to provide additional mitigation assistance to families affected by flooding, and address the problems of delays in buyouts for communities facing repetitive losses.”30
* The “State Flood Mitigation Revolving Fund Act” (H.R.1610/S.2192-116th) to ascertain a brand new Federal-state partnership to offer low-interest loans for initiatives, comparable to elevation initiatives, flood-proofing actions, relocation or removing of buildings, and different initiatives.31
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29 https://www.hudexchange.info/programs/htf/; https://www.cdfifund.gov/programs-training/programs/cmf
30 https://casten.house.gov/media/press-releases/casten-blumenauer-introduce-bill-help-communities-facing-flood-damage
31 https://www.pewtrusts.org/-/media/assets/2019/03/state-flood-mitigation-revolving-fund-supporters-draft-3-11-2019.pdf
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* The “Disaster Tax Relief Act of 2021” (H.R.3954) provisions that, like federal catastrophe mitigation grants, would exempt from federal taxation state catastrophe mitigation grants that assist individuals defend their houses towards windstorms, earthquakes, or wildfires;32 and
* The “Strengthening Homes and Eliminating Liabilities Through Encouraging Readiness (SHELTER) Act (H.R.3925/S.1805) to offer people and companies a catastrophe mitigation tax credit score, particularly 25% of qualifying mitigation bills of as much as $5,000.33 As a member of the SmarterSafer Coalition, the RAA helps the Coalition’s priorities in relation to insurance policies pertaining to local weather resiliency and pre-disaster mitigation:
* Enhance infrastructure-related analysis, together with that which pertains to local weather threat, and match new findings from new analysis with superior pre-disaster mitigation plans and funding in pre-disaster mitigation,
* Ensure the advantages of local weather analysis, technological modernization, and pre-disaster mitigation efforts attain weak communities which are oftentimes these most adversely impacted by local weather change,
* Invest in pure and local weather resilience infrastructure initiatives, and pair pure infrastructure with extra conventional (gray) infrastructure to reap the utmost advantages from each entities and obtain twice the safety,
* Improve infrastructure resilience in America’s floodplains, as envisioned within the “Flood Risk Management Act” (S. 1688), the “Flood Resiliency and Taxpayer Savings Act” (H.R. 481) and the “Built for Future Disasters Act of 2021” (talked about above); and take into account and deal with the racial inequities inherent in federal catastrophe help and hazard mitigation help applications that mirror and perpetuate discriminatory practices and historic redlining,
* Protect the housing inventory because the inverse relationship between local weather change and entry to secure housing continues to get stronger,
* Facilitate and strengthen public-private partnerships, comparable to transferring threat to non-public financing, insurance coverage, and reinsurance to shift among the monetary burdens related to local weather change from the federal government’s steadiness sheet to prepared personal sector members to enhance the implementation of federal applications,
* Direct Federal funds to outcome-driven initiatives that strengthen communities and scale back long-term threat, comparable to requiring stronger minimal design requirements and incorporate forecasts of future situations for federal infrastructure investments, as envisioned within the “Build to Last Act” (S.1282/H.R.2760),34
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32 https://mikethompson.house.gov/newsroom/press-releases/thompson-announces-introduction-of-disaster-tax-relief-act-of-2021
33 https://www.cassidy.senate.gov/newsroom/press-releases/cassidy-bennet-introduce-new-tax-credit-for-working-families-small-businesses-preparing-for-natural-disasters-; https://crist.house.gov/news/documentsingle.aspx?DocumentID=2386
34 https://www.smartersafer.org/about-us/; https://www.smartersafer.org/2021/07/15/smartersafer-infrastructure-priorities-letter/
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* Fully implement Risk Rating 2.0 and help its mission to equitably value threat throughout all NFIP policyholders,
* Procurement of modernized FEMA flood maps that higher determine adjustments in flooding patterns and actions in flood threat to higher talk who’s in danger and the extent of threat confronted, and
* Enhanced interagency coordination to make sure that all companies throughout authorities profit from improved communication, knowledge, and expertise that may help in each pre-disaster mitigation and post-disaster restoration efforts.
As a member of the BuildRobust Coalition, the RAA helps the Coalition’s work to additional the achievements of the bipartisan “Disaster Recovery Reform Act of 2018,” which considerably elevated America’s funding in pre-disaster mitigation to assist communities defend towards catastrophe threat. The RAA helps the “Resilient AMERICA Act” (H.R. 5968), together with the invoice’s aims to:
* Increase catastrophe mitigation funding for FEMA’s Building Resilient Infrastructure and Communities (BRIC) program,
* Provide incentives for state and native communities to strengthen and implement constructing codes,
* Invest in risk-reducing enhancements to enhance the resilience of lifeline infrastructure,
* Create incentives and investments that assist to enhance resilience, and
* For state, native, and tribal governments, present assets and get rid of obstacles to boost resiliency and defend towards all hazards.35
Conclusion
The above-mentioned reforms can additional facilitate the event of a personal flood insurance coverage market and enhance the viability of the NFIP. The RAA strongly helps RR 2.0, which might extra exactly mirror the actual threat of flooding of properties with extra superior actuarial instruments and disaster fashions. The reinsurance market is and has the capability to underwrite flood insurance coverage threat, together with excessive flood threat, within the public NFIP program, personal market, and any future public-private flood insurance coverage partnerships. Actions taken in recent times by some states, comparable to Florida, have demonstrated the curiosity and advantages of personal insurers assuming a broad cross-section of threat, and the identical would consequence from the above flood insurance coverage reforms. Reinsurers stand able to companion with each the private- and public-sectors because the flood market transitions.
The RAA appears ahead to persevering with to work with Subcommittee Chairman Cleaver, Subcommittee Ranking Member Hill, Financial Services Committee Chairwoman Waters, Financial Services Committee Ranking Member McHenry, and different members of the Committee on laws that gives a long-term reauthorization of the NFIP and reforms that strengthen NFIP’s monetary framework and resiliency, facilitate the event of a personal flood insurance coverage market, shut the flood insurance coverage safety hole, and create resilient and insurable communities. Thank you on your consideration of our views and proposals. The RAA and its members welcome the chance to fulfill with you about our views and proposals, present a briefing on FEMA’s RR 2.0 knowledge, work with you to develop a long-term NFIP reauthorization and reform invoice, or reply any questions you could have.
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35 https://buildstrongamerica.com/about-us/; https://homeland.house.gov/imo/media/doc/2021-06-08-EPRR-HRG-Testimony-Williams.pdf
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Original textual content right here: https://financialservices.house.gov/uploadedfiles/hmtg-117-ba04-wstate-nutterf-20220525.pdf