Flood Insurance Reform to Raise Rates

By Mike Colpitts

Legislation being debated to reform homeowners federal flood insurance would renew the program for five years, and is likely to raise the rates on insurance premiums to over come the $18.3-billion deficit facing the National Flood Insurance Program largely due to damages paid as a result of hurricanes in 2004 and 2005.

National Flood Insurance

In the intervening years the number of private insurance companies leaving the program has dropped from 115 to 70, according to an audit of the program.

A Republican sponsored draft of a proposal in Congress would renew the program for five years, phase out insurance premium subsidies and provide additional coverage to insurance customers for living and business expenses. The bill was released by Rep. Judy Bigger (R-Ill.) chair of the Insurance, Housing and Community Opportunity Subcommittee of the House Financial Services Committee.

The national flood insurance program was started to provide homeowners with flood insurance after the private market, fearing massive insurance losses in years of devastating natural disasters along U.S. coastlines, failed to provide insurance coverage and was originally backed by the Teamster Union pension fund.

A U.S. Government Accountability Office report released in February criticized the federal insurance program for poor management practices.

stranded on the roof

Facing a growing federal deficit, members of Congress are seriously concerned about the programs future. “Something has to be done,” said Rep. Emanuel Cleaver (D-Mo.). “The program simply can’t continue.”

The current federal flood insurance program is set to expire Sept. 30th. But the new proposal does not offer a solution to cover the $18.3-billion the program is in debt. However, the proposal does try to put the federal program on sounder financial ground by stating that subsidized prices to most policy holders would be raised to cover the cost of damages already incurred, and future estimated pay-offs.

The reform act being proposed would phase-in full actuarial rates, study the feasibility of privatization for flood insurance coverage, which is required by mortgage companies and banks in flood prone areas and develop incentives to upgrade building codes and other provisions.

Stephen Ellis

However, Stephen Ellis, vice president of Taxpayers for Common Sense, a non-partisan government watch-dog group voiced opposition to the proposal at the first hearing in Washington, D.C. organized to open debate on the issue. “The euphemistically named Homeowners Defense Act would actually end up putting tax payers at risk and subsidizing people to live in harm’s way. Tax payers across the country would be forced to pay for a narrow bail-out that primarily helps the well off,” Ellis told the panel of lawmakers.