[Senate Hearing 115-16]
[From the U.S. Government Publishing Office]
S. Hrg. 115-16
REAUTHORIZATION OF THE NATIONAL FLOOD INSURANCE PROGRAM
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE REAUTHORIZATION OF THE NATIONAL FLOOD INSURANCE PROGRAM
__________
MARCH 14 AND MAY 4, 2017
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Travis Hill, Senior Counsel
Jared Sawyer, Senior Counsel
Brandon Beall, Professional Staff Member
Graham Steele, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Beth Cooper, Democratic Professional Staff Member
Erin Barry, Democratic Professional Staff Member
Megan Cheney, Democratic Legislative Assistant
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, MARCH 14, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESS
Roy E. Wright, Deputy Associate Administrator for Insurance and
Mitigation, Federal Emergency Management Agency................ 3
Prepared statement........................................... 36
Responses to written questions of:
Senator Shelby........................................... 41
Senator Heller........................................... 45
Senator Tillis........................................... 48
Senator Kennedy.......................................... 52
Senator Donnelly......................................... 56
Additional Material Supplied for the Record
Letter submitted by the National Multifamily Housing Council and
the National Apartment Association............................. 60
Statement submitted by the Property Casualty Insurers Association
of
America........................................................ 64
Testimony submitted by the Consumer Mortgage Coalition........... 72
----------
THURSDAY, MAY 4, 2017
Page
Opening statement of Chairman Crapo.............................. 111
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 112
WITNESSES
Steve Ellis, Vice President, Taxpayers for Common Sense, on
behalf of the SmarterSafer Coalition........................... 113
Prepared statement........................................... 139
Michael Hecht, President and Chief Executive Officer, Greater New
Orleans, Inc., on behalf of the Coalition for Sustainable Flood
Insurance...................................................... 115
Prepared statement........................................... 144
(iii)
Larry Larson, Director Emeritus, Association of State Floodplain
Managers, Inc.................................................. 117
Prepared statement........................................... 149
Responses to written questions of:
Senator Scott............................................ 161
Senator Heitkamp......................................... 161
Additional Material Supplied for the Record
SmartSafer National Flood Insurance Program Reform Proposal,
February 2017.................................................. 166
An Illustration of the Benefits of Private Market Depopulation
and Reinsurance Risk Transfer.................................. 177
Statement of the Reinsurance Association of America.............. 180
Letter submitted by the Consumer Federation of America........... 181
REAUTHORIZATION OF THE NATIONAL FLOOD INSURANCE PROGRAM--PART I
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TUESDAY, MARCH 14, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:03 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
We are joined by Roy Wright, Deputy Associate Administrator
of Insurance and Mitigation at the Federal Emergency Management
Agency. Mr. Wright, thank you for being here with us today. He
returns to the Committee following his testimony last September
on recommendations from the Technical Mapping Advisory Council.
Today he will provide testimony on the operations and
financial condition of the National Flood Insurance Program,
steps FEMA has taken to implement legislative reforms, and to
recommend potential legislative reforms.
Our Nation has seen some of the most devastating natural
disasters in its history the last two decades. These
catastrophes displace families, harm businesses, and disrupt
lives.
The NFIP was created nearly five decades ago as the rising
cost of providing post-disaster relief fell on taxpayers. The
program's mission is to expand homeowners' access to flood
insurance in exchange for local communities reducing their
exposure to flood risk.
Currently, the NFIP administers approximately 5.1 million
policies, totaling $1.25 trillion in coverage across 22,000
communities.
Unpredictable weather and changing topography leave
businesses and households across thousands of communities
vulnerable. Since 2005, Hurricanes Katrina, Irene, Superstorm
Sandy, and others have overwhelmed gulf and coastal communities
and drastically increased claims.
But flood disaster is not unique to the coasts and gulf as
nearly one-fifth of all NFIP claims come from outside of high-
risk areas. The frequency and scale of recent catastrophes have
pushed the program to amass $24.6 billion in debt with the
United States Treasury Department. The program's structural
issues must continually be addressed so that it can better
withstand strenuous conditions.
Throughout its history, Congress has acted to significantly
reform the program to make it more efficient and effective.
Since 2012, legislative action has improved communication of
actual flood risk and spurred communities toward better
floodplain management while also balancing affordability to
promote widespread flood insurance adoption.
But there is still work to do. Today Mr. Wright will
provide recommendations on how to improve the program, for
example: how FEMA can use technology, such as LIDAR, to create
maps that better reflect true flood risk; how to best promote
the growth of the private insurance market so that
policyholders have more options--and in some cases, more
affordable options than offered through the NFIP--and risk is
shared by both the Government and the private sector; and how
long the program should be reauthorized to ensure that reforms
can be implemented and the market has greater certainty.
Senator Brown and I have started working together on a
bipartisan basis to hear the thoughts and concerns of various
stakeholders and Members of the Committee, and we look forward
to working with FEMA to understand the legislative changes that
can help the NFIP achieve its goals.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for calling this
hearing today on the reauthorization of the NFIP. Mr. Wright,
thank you for joining us again. Your comments were helpful last
time. We look forward to that again.
The most common and costly natural disaster facing our
constituents is flooding, yet it is hard to insure against
that. There was almost no private market before the advent of
the NFIP almost 50 years ago.
With a growing population and with a changing climate, our
entire Nation will continue to grapple with this issue in the
years ahead. We will have a direct impact on Ohioans and on
other Americans who experience flooding. We will also have an
indirect impact on all taxpayers no matter where they live as
the country seeks to help families and communities recover from
these events.
NFIP is a critical component of our Nation's response to
the threat of flooding. It seeks to combat the effects of
flooding through four interrelated components: flood insurance
to help property owners recover quickly after a flood and
reduce the need for Federal emergency appropriations; second,
floodplain management to minimize damage to people and property
through the adoption of local ordinances and building codes;
third, floodplain mapping to identify flood hazards and
communicate that risk to homeowners and communities; and,
fourth, mitigation to help remove property from harm's way
through property-level and community investments that reduce
the overall level of risk.
Today Mr. Wright will share FEMA's views about
reauthorization of the path forward for NFIP. To help inform
this process, I would like to get a sense of where FEMA is in
implementing reforms Congress enacted in 2012 and 2014. I would
also like to hear about FEMA's progress in implementing its
administrative transformation efforts to improve the NFIP
following Superstorm Sandy.
I look forward to working with Chairman Crapo and the
Members of this Committee to strengthen NFIP and the country's
comprehensive approach to mitigating flood risk through a
timely reauthorization. Welcome back. Thank you.
Chairman Crapo. Thank you, Senator Brown.
Mr. Wright, you may proceed.
STATEMENT OF ROY E. WRIGHT, DEPUTY ASSOCIATE ADMINISTRATOR FOR
INSURANCE AND MITIGATION, FEDERAL EMERGENCY MANAGEMENT AGENCY
Mr. Wright. Good morning, Chairman Crapo, Ranking Member
Brown, and Members of the Committee. Thank you for the
opportunity to testify today.
I want to discuss four core principles for reauthorization
today: first of all, on-time, multiyear reauthorization;
second, we need to increase the flood insurance coverage across
the Nation through both an expansion of the private flood
insurance markets as well as the National Flood Insurance
Program; we need to address barriers to meeting the needs and
demands of our customers; and, fourth, we need to bring
transparency to the financial framework of the National Flood
Program.
As both Mr. Crapo and Mr. Brown mentioned, flooding is the
most frequent and expensive disaster; 98 percent of the
Nation's population are in the 22,000-plus communities that
rely on the National Flood Insurance Program. And we deliver
for 5.1 million policyholders through 73 private insurance
companies that participate with us.
Due to the nature of flooding, impacts can vary
significantly each year. After 15 years of lower-than-expected
damages, Hurricanes Katrina, Rita, and Wilma hit the Nation in
2005. These three catastrophic events resulted in NFIP claims
totaling 8 times the size of any prior year in the history of
the program.
Rather than directly providing the funds to meet these
requirements, Congress directed the NFIP to pay for the
catastrophic losses through funds borrowed from the Treasury.
Paying the insured losses in 2005 required the NFIP to borrow
$17.5 billion.
In 2012, Hurricane Sandy hit the east coast and resulted in
more than 144,000 claims. The program paid out an initial $8.4
billion to policyholders. With the corrective actions FEMA
took, the NFIP has since paid out an additional $350 million.
Since Hurricane Sandy, FEMA has been transforming the NFIP
customer experience and improving oversight and engagement of
our Write Your Own companies. FEMA, using its own authorities,
has implemented a new appeals process, improved oversight of
Write Your Own companies, with special attention to litigation.
We have streamlined the process for making regular changes to
FEMA's relationship with the private sector partners. And we
have begun to modernize the product to better provide the
coverages that policyholders want and expect.
The NFIP has also implemented changes to take a more
proactive role in disaster readiness and response. 2016 is a
case in point. We issued advance payments to policyholders of
up to $10,000 while their full claims were processed. We
increased the coordination with State insurance commissioners.
We deployed our insurance staff directly down range as part of
the field operations. And we had far more proactive
communication with policyholders and Write Your Own insurers.
I would assert that FEMA's performance in 2016 demonstrates
the corrective progress we have made. While there was no single
catastrophic disaster in 2016, the multiple flooding events in
Louisiana, Texas, and several other States during Hurricane
Matthew resulted in the third largest payout in the NFIP's
history. The incurred losses from 2016 events will total more
than $4 billion.
The residual debt from Katrina plus Sandy and then this
past year's loss leaves the program with liabilities to the
Treasury now totaling $24.6 billion. Moving forward, the annual
interest-only payments are nearing $400 million. So we are
going to return to the core principles for reauthorization that
I highlighted.
First, the NFIP needs an on-time, multiyear
reauthorization. Simply, the stability of the real estate and
mortgage markets depend on this.
Second, the reauthorization should recognize the need to
increase flood insurance coverage across the Nation in both
high- and moderate-risk areas.
FEMA recognizes that there is a growing interest by private
insurers to offer flood insurance protection. FEMA supports
this because an insured survivor--regardless of whether they
purchase their coverage through the NFIP or on the private
market--will recover more quickly and more fully. To these
ends, we must realize it will take time for the private market
to adapt to the market currently served by a public program.
If the private market were to glean only our lower-risk
policies, the NFIP would be left with all of the highest-risk
policies. This could lower NFIP premium revenue while
increasing potential claims payouts. Such an action would leave
the program with even more financial risk, with greater
reliance on taxpayers and the Treasury each and every year.
As we look forward, a number of opportunities could be
explored. Congress could identify a future point in time by
which flood policies for all new construction would be provided
solely by the private market. When coupled with ongoing
floodplain management and building code enforcement, these new
residential structures would be built to insurable levels for
risk that the private market could assume.
Third, we need to remove barriers to providing
policyholders the coverages they want and need, addressing
higher coverage limits, single deductibles, and losses,
including basements.
And, finally, we would be better off in the future
regarding the National Flood Insurance Program if we truly had
a sound financial framework. We need to price the risk, make it
plain, whether this is done through increasing premiums,
reducing risk through mitigation grants, or discounts directed
by Congress. The solvency of the program depends on it.
Thank you, Mr. Chairman, for the opportunity to speak with
you today, and I look forward to the conversation.
Chairman Crapo. Thank you very much, Mr. Wright.
Before we begin the questions, I want to ask all of our
Members to please stay very close to your 5 minutes. In the
last hearing, which I started doing this, we all started taking
a minute or two more, and ultimately some of our newer Members
had to sit around for a long time before we got to them. So I
will follow this rule. I started it last time. But I just ask
you, if you get close to the end of your 5 minutes, to wrap it
up.
Mr. Wright, between 2008 and 2012, the NFIP saw 17 short-
term extensions and 4 expirations. What are the consequences
for existing and prospective policyholders of letting the
program expire?
Mr. Wright. We absolutely need to do everything in our
power to ensure that this is done on time and for a multiple
set of years. When this program expires or lapses, we put
ourselves in a position that we have a dampening effect or even
an absolute limiting effect on the real estate and mortgage
markets. Any structure, any residential home that is going to
have a federally backed mortgage needs to have the availability
of flood insurance. When the program lapses, we cannot write
new policies.
Chairman Crapo. All right. Thank you. Many States across
the country have experienced the devastation of wildfires in
recent years. In Idaho, recent wildfires have destroyed
businesses, caused health problems, and scarred public lands. I
am concerned that wildfires also make certain areas at a higher
risk of flooding.
Mr. Wright, can you walk the Committee through the impact
wildfires have on flood risk?
Mr. Wright. Absolutely. So for those of you who are not
from areas of the country where we deal with wildfires, after
you have a fire there in that wildland area, you see those
black scars. Those scars are ostensibly an asphalt slip-and-
slide. When water hits it, nothing absorbs, everything conveys.
And so for the 3 to 5 years immediately after a wildfire, the
flooding risk in those adjacent areas at the bottom of that
watershed increases.
One of the things that the Committee did in 2012 was ensure
that we had authorities related to post-wildfire, and so when a
wildfire has been on public lands, our normal 30-day wait
period is waived and homeowners can move promptly to have the
coverages they need. Really, it is that 3- to 5-year period of
time until that can regenerate and grow, but it clearly
exacerbates the flood risk, sir.
Chairman Crapo. And is the authority that was already
granted adequate?
Mr. Wright. I do think that from a flood insurance
perspective, those authorities have proven useful. I think what
I am not yet seeing is enough of an uptick after the event,
after that fire, to ensure that there is sufficient coverage.
So the ability to sell, the ability to make it available
immediately, the authorities are there. We think we need to
continue to collaborate on ways to make sure that people
understand that risk and that they should be buying insurance
in the immediate period afterwards.
Chairman Crapo. And if there were authorities that would
help to mitigate the risk itself, that would be helpful as
well.
Mr. Wright. It is, and so through some of the other
authorities that FEMA has that have since expired under the
Stafford Act, we ran a pilot so that post-wildfires, when many
States or communities get the Fire Mitigation Assistance
Grants, we were making available fire mitigation immediately
afterwards. We considered it an emergency protective measure,
and there were a series of projects that could be done to
stabilize that area to minimize that flood risk going forward.
While outside of the Flood Insurance Act, the other part of my
job related to the Stafford Act, I think that is the kind of
authority that we could truly use again.
Chairman Crapo. Thank you. And in October 2012, Pew
Charitable Trust noted that historically repeatedly flooded
properties have accounted for just 1 percent of the properties
within the National Flood Insurance Program policies, but about
25 to 30 percent of the claims. To what extent are repetitive
loss properties and severe repetitive loss properties
responsible for the program's current financial problems?
Mr. Wright. So I want to take this from two angles. At the
top forward piece, these repetitive properties are a drag on
the program. They constitute a disproportionate kind of payout,
and we need more authorities, I would say, to address that. I
would highlight, though, that today there are multiple
definitions of ``repetitive loss'' in the National Flood
Insurance Act. We would do well to harmonize those, first of
all; make it clear where we should go from a mitigation
perspective; and I would assert to you we need to look at are
there points by which they have experienced enough damage that
if they are not willing to take the offer of mitigation and
have us acquire that property, we need to look at whether or
not we should still be making flood insurance available to them
at the discounted prices that many of them receive with
grandfathering subsidies.
Chairman Crapo. Thank you very much.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Mr. Wright, we have seen media reports that the
Administration is considering cuts to the FEMA budget of 11
percent in order to fund the Mexican wall, the border wall.
Regardless of your personal view of the wisdom of building the
wall, tell us, if you would, what the effects of an 11-percent
cut would be on FEMA's flood mapping efforts. And how would
cuts to the mapping budget square with the effort to improve
flood mapping in order to better identify and mitigate the risk
of flooding?
Mr. Wright. Senator Brown, I have seen the reports, and I
think that at this point I am not aware that the final
decisions have been made from the President's budget, and so I
think it is premature for me to speak about those specifics. I
would refer you to the Office of Management and Budget. Once we
see those, I would be happy to talk through those specifics.
I think to your point, though, about mapping, we need to
look at a couple of the elements. So this Committee helped
insert an authorization level related to the mapping so that we
would understand risk. That is at $400 million a year under the
current act. We have never been appropriated equal to that
level. For this past year, we had a combined mapping budget of
about $311 million; $190 million of that was directly
appropriated, and the balance of that was paid for by fees.
We will see where the budget proposal comes down the road
on this, but, clearly, the investment in mapping is one that
requires resources. And when we are looking broadly across a
budget, that includes tradeoffs.
Senator Brown. Considering the pressure on the budget with
a defense spending increase of whatever the President has
called for, $50 billion up, and a major capital expenditure
like the wall, it is hard to believe there is not going to be
some hit that you are going to need to figure out when you
determine these questions.
One of the TMAC recommendations was developing a 5-year
plan for map development. Talk to us about this plan and how it
would further mapping improvements that we discussed at the
hearing back 6 months ago.
Mr. Wright. Absolutely. So since that point, we have
actively begun implementing that recommendation. It is being
advanced in two ways.
First of all, I am looking holistically at where does the
program need to go. We are looking at technologies, what kind
of investments. I would highlight particularly our attention to
ensure that there is elevation data available across the
Nation.
But the second piece I think really gets to the root of the
element that the Technical Mapping Advisory Committee asked us
to address. This spring we are engaging with States across the
country to begin to lay out what the sequencing of maps would
be, because as we had done in the past and given the budget
uncertainty that had been suspended, we used to go through a
process so they could see it coming and they knew when we would
be coming to their community next. Regardless of what happens
in the budget, we are moving with the States to implement that
recommendation now.
Senator Brown. In the September hearing, we discussed the
tension between risk-based flood-insurance rates and affordable
rates for low- and moderate-income homeowners. Congress 3 years
ago directed FEMA to develop a draft affordability framework
for the NFIP. What is the status of the affordability
framework? And when do you expect to send it to us?
Mr. Wright. So the affordability framework is due to the
Committee in September of this year. We have worked with the
Government Accountability Office as well as the National
Academies of Science in terms of building this.
One of the things that we have been able to do since I saw
you last fall was to begin a partnership with the Census Bureau
by which we are going through and doing data matching of our
policyholders against what we can know from census data. It is
a controlled environment that is going to give us some better
insights into it. We are already seeing very clear data that
say that those who live in the high risk of flooding make tens
of thousands dollars less than those who live outside on
average.
At this point, though, we are just at the beginning of
getting those data. That is then being brought together with a
series of policy options. I look forward to wrapping up that
initial work inside the agency here in the next couple of
months, and then we will begin the process of collaborating
with the Administration in order to be able to transmit a
report to you this fall.
Senator Brown. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
Mr. Wright, do you know a company by the name of U.S.
Forensic?
Mr. Wright. I am aware of the company.
Senator Kennedy. I believe they got in a little bit of
trouble representing some of the companies after Hurricane
Sandy. Is that correct?
Mr. Wright. That is correct.
Senator Kennedy. What was that trouble?
Mr. Wright. And so they were involved in some of the cases
where engineering reports were required after the event, and
some of their work was sloppy at best or dead wrong at worst.
Senator Kennedy. They altered some reports, didn't they?
Mr. Wright. That is my understanding.
Senator Kennedy. OK. And they were sanctioned by a Federal
judge. Is that correct?
Mr. Wright. So there were a couple of companies from the
engineering space that were involved in this. Given some things
that played out with this, there were some sanctions that were
done.
What we have done is collaborate with the Attorneys General
in both New York and New Jersey, as well as with the Department
of Homeland Security's Inspector General. Those are the folks
who have the authorities and powers to follow through on those
questions.
I would highlight that one of the companies--not the one
you are mentioning now--was convicted, given some work by the--
--
Senator Kennedy. Well, you are familiar with the flooding
we had in March and April last year in Louisiana.
Mr. Wright. Very much so.
Senator Kennedy. What is U.S. Forensic still doing
engineering work now in Louisiana?
Mr. Wright. So I cannot prohibit the use of the company
unless we have gone through a complete debarment process. The
convicted company has been debarred. Otherwise, that is the
collaboration that we are doing with the Inspector General.
What I can do and have done is fundamentally change the
quality control of all of the work that is done by engineers,
so that as the various companies are involved in it, I can be
assured of the outcomes.
Senator Kennedy. Well, the Federal judge in New Jersey
accused this particular firm--these are the judge's words, not
mine--of ``reprehensible gamesmanship.'' That is not enough to
get you off the list?
Mr. Wright. Based on that, we worked and are continuing to
supply information to the State Attorneys General in New York
and New Jersey who have the law enforcement capabilities to
take actions against them.
Senator Kennedy. OK. Are you familiar with an attorney by
the name of Gerald Nielsen?
Mr. Wright. I am.
Senator Kennedy. I believe he had some difficulties in
representing some clients after Hurricane Sandy, too, did he
not?
Mr. Wright. That is my understanding.
Senator Kennedy. Could you tell me about that?
Mr. Wright. So I have never met Mr. Nielsen. My
understanding is that he is employed by some of the Write Your
Own companies to represent them in litigation.
Senator Kennedy. His firm that he was representing was
sanctioned $1 million for violating discovery orders in
litigation after Hurricane Sandy. Is that right?
Mr. Wright. I am not aware of the specifics related to
sanctions related to him.
Senator Kennedy. OK. You are not familiar at all with that?
Mr. Wright. You listed a dollar value. I am not aware--I
understand that he was called in to account by a judge, and
based on this, I will tell you that more holistically, not just
that action, I have looked at and continue to collaborate with
the Inspector General to look holistically at the actions of
these lawyers.
Senator Kennedy. Well, he is still representing the WYO
companies, is he not?
Mr. Wright. My understanding is there are Write Your Own
companies who still use him, yes.
Senator Kennedy. And why is that?
Mr. Wright. So they have choices to use lawyers. As they do
that process--again, this goes back to the engineering side--if
a lawyer has been debarred or disbarred, then I can prohibit
their use. What I can do and did roll out last summer was
fundamental changes to how we oversee all of the litigation
work that is done. And so while I do not get to choose the
lawyers, I do get to influence and ultimately direct the
litigation strategy about when we should pursue that in court
and when we should step back and say the right thing to do is
settle on this case.
Senator Kennedy. Well, if I understand your testimony, you
do not do anything unless somebody is disbarred if they are an
attorney, or if they are an engineer unless they are what?
Mr. Wright. I can change the quality standards. I can hold
them to those from a control perspective. The ultimate
selection of those is left to the Write Your Own companies
unless they have been debarred.
Senator Kennedy. And you do not have any influence
whatsoever? You cannot pick up the phone and call these
companies and go, ``Hey, we have got some problems here''?
Mr. Wright. Sir, I think the companies know my opinion of
these various actors. The kind of open questions given their
actions that brought on questions of the credibility of the
program, I have spoken very plainly about that. But, again,
sir, folks have rights to due process, and I do not have the
ability single-handedly to remove any one player.
Senator Kennedy. Thank you, Mr. Chairman.
Chairman Crapo. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
I am pleased that we are starting the process to reform and
reauthorize the National Flood Insurance Program early so that
we have enough time to fix this complex program once and for
all. For 231,000 New Jerseyans, this is an incredibly important
program, as we saw in Sandy. And in the aftermath of Sandy, I
saw firsthand all the problems with the program and the work
that needs to be done.
Sandy was a natural disaster, but the delays, the denials,
the disputes they encountered throughout the flood insurance
claims process, that was a man-made disaster--the arbitrary
rules, inflexible deadlines, the gaping loopholes, the
``gotcha'' clauses, the chronic underpayments, the constant
run-around.
So with this experience fresh in mind, I am eager to lay
out the reforms that I hope the Committee will fight for in the
days and weeks ahead. Certainly I will. My goal is to make the
Flood Insurance Program simple, affordable, fair, efficient,
and accountable to consumers and taxpayers. Americans deserve a
program that is sustainable for taxpayers, affordable for
homeowners, and accountable to everyone.
Now, I would like to follow up on Senator Kennedy's
questions about the Nielsen firm. In the aftermath of Sandy,
thousands of New Jerseyans faithfully paid their flood
insurance premiums for years, often decades, without ever
making a claim, and then had the rug pulled from underneath
them when they were significantly underpaid by FEMA's private
insurance contractors. And the appeals process, which was
fundamentally broken at the time, many were forced to go
through the frustrating, time-consuming, and expensive process
of going to court to get what they were entitled to.
FEMA's private contractors account for more than 90 percent
of the cases the Nielsen law firm did everything in its power
to drag out the proceedings, draining time, resources, and
money from Sandy victims who had little to spare of each.
Rather than work in the interests of justice, the Nielsen law
firm filed countless frivolous motions seeking to run up their
legal fees, which Nielsen himself bragged would surpass $100
million.
To add insult to injury, these millions of dollars came
partially from the very policyholders he was fighting in court.
He dealt with Sandy victims like they were the perpetrators,
enriching himself as their expense, bullying, scaring people
out of court, hiding documents. And when they finally got
caught and were excoriated by a Federal judge for a ``shocking
effort to curtail inquiry'' and a level of admonishment rarely
seen in Federal litigation, the judge said, ``I find that
counsel for Wright violated its obligations to comply with this
Court's discovery orders . . . unreasonably prolonging this
litigation, imposing unnecessary costs upon plaintiffs and
further contributing to the unwarranted delays.'' There is not
a morsel of regret by that firm.
So to my knowledge, this law firm is still representing
Write Your Own's in lawsuits. Isn't that true, Mr. Wright?
Mr. Wright. That is my understanding as well.
Senator Menendez. So a firm with such a troubled and
possibly illegal past can be given the opportunity to represent
FEMA even though they have such a record?
Mr. Wright. Yes, sir.
Senator Menendez. Well, so are you telling me that FEMA
does not have hiring and firing authority for these attorneys,
even though FEMA is on the hook financially and has its
reputation on the line?
Mr. Wright. We do not. Instead, what we have is two things.
In the aftermath of Sandy--and you were involved with my
predecessors to move much of this along the road--FEMA withdrew
all of the cases so that we could personally manage those with
our staff.
And, second, we changed the way by which litigation
oversight takes place going forward.
Senator Menendez. Would giving FEMA the authority to choose
or at the very least approve a private attorney's representing
them help you control legal expenses and speed up the
resolution of lawsuits?
Mr. Wright. I think it is one of the elements, sir, that we
need to look at.
Senator Menendez. Let me ask you in a different context,
Write Your Own's, FEMA contracts with private insurance
companies to sell and service its flood insurance policies.
Despite taking on none of the risk, these Write Your Own's, as
they are known, reap significant profits from the program. In
fact, estimates show that the Write Your Own's pocketed more
than 43 cents of every dollar in premiums in the year Sandy
hit. That is an awful lot of money for an insurance company
that does not bear any of the risk.
Is it appropriate for these private companies that have no
skin in the game to receive more than a third of all premiums
collected?
Mr. Wright. Mr. Menendez, we need to pull down the costs;
we need to make all of this far more efficient. I would want to
highlight for you, though, as we look at compensation, you
know, as we look at the standard compensation of 30.5 cents,
the first 15 to 17 cents go to agents who are small business
owners in your State. I want to make sure that we are fair to
them. They are the sales force we need on the ground. We then
look at the State taxes we also pay out of that. So I can look
at the dimensions of it. You guys have directed us in the last
cycle to change this. We are in the process of taking that on
from rulemaking. We have collaborated with the Government
Accountability Office whose report on this, I think in
December, is one that I have learned quite a bit from.
But to simply say it, sir, we need to pull down the costs.
We need to make this more efficient as we go forward.
Senator Menendez. Well, Mr. Chairman, 43 cents on every
dollar to a private insurance company that is not on the hook
for anything does not seem to me to be a system that ultimately
works in the interest of the taxpayer. I have a lot more
questions. I will submit them for the record.
Chairman Crapo. Thank you, Senator Menendez.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Let me provide a little bit of the other side of this. In
my former life, I was a property and casualty agent, and the
agency that we had actually participated in the Write Your Own
Program, and we wrote flood insurance through a private
carrier, and we did it as much as a service for those
individuals that we wrote their other property and casualty
for. It was a challenging part, and yet writing it through a
carrier that you also did other business with made it easier to
work through the processes.
I agree with you that the reauthorization is critical and
that it should be timely and that it should be one that runs
over a period of years. I also agree with you that there should
be more insurance coverages being written, particularly those
in areas in which you are actually collecting a fair premium
for a fair risk, meaning those with less hazards.
Personally, I have flood insurance on my home, and in
looking at how that was written, it is in a category which is
the least expensive of the categories. But there is a limit on
it of $250,000 for structure, and at one time I think that
would probably cover a lot of the structures that are out
there. But as homes have continued to increase, if you look at
the insurance values, most insurance companies that write
homeowners' coverages will tell you that they want to be able
to insure to the value of a home, and the reason is because, in
the case of a loss, you are always going to, as the carrier,
pay for that part of the loss, unless you have a contract in
place that says if you are not fully insured they are only
going to pay a percentage of the loss involved.
I am wondering if the National Flood Insurance Program
should perhaps take a look at either increasing the total
amount of structure coverage, particularly in those areas where
it would be perhaps more profitable to write and, thus, gain
more premium dollars, and also it looks to me like since you
have a larger risk in some of your homes, you avoid the
adversity of insuring the first $250,000 of any loss that
occurs.
Have you thought about that in terms of what your options
might be?
Mr. Wright. Yes, sir, and I appreciate the question and the
nuance that you have offered inside of this. The $250,000 limit
is set by statute. It was last adjusted in 1994. Very clearly,
the value of homes has gone up over the last 20-some-odd years.
We would benefit from an increase in that. I think at the
time that number was calibrated to the kind of Freddie/Fannie
side of, you know, those conforming loans. That number sets up
at $427,000 today. And there is a very real problem, in my
estimation, related to underinsurance that you are highlighting
there by which ostensibly a $250,000 full payout on that policy
could very well just be a 50-percent loss.
And so this is an adjustment that I would be happy to work
with you all on. It is one that should be addressed.
Senator Rounds. It most certainly would bring more what I
would call ``healthy'' or ``profitable'' premium dollars into
the program.
Mr. Wright. Well, and I think this is an important point.
To the degree that we allow that to go up, I would assert that
it should only be on the actuarially sound rates only----
Senator Rounds. Yes.
Mr. Wright. ----so that we are not increasing the risk on
the grandfathered and pre-firm side of the equation, and it
would increase the revenue into the program and help us remain
more financially sound.
Senator Rounds. It would seem to me, though, also that you
may be working at odds against yourself if all new construction
you were looking at--if you simply allowed that to be written
outside the program, it would appear to me that you are
basically taking older homes then and you are not taking newer
homes that may very well be in areas with appropriate flood
protection. I think I would caution against a broad approach
suggesting that the flood insurance not participate in those
markets as well.
Mr. Wright. So I appreciate that, sir. As I look at it,
there has been a desire from many to see the private market
expand. And from a public policy perspective, the more people
who are covered, the better. I want people covered whether it
is through private or through----
Senator Rounds. But if you are taking the risk on the rest
of it, you have to spread the risk. If you take the healthiest,
as I would call it, of the premium dollars, the most
profitable, and allowing the outside market to have that, that
hurts you in the long run with the National Flood Program.
Mr. Wright. Over a 10-year horizon, it would. You are
correct.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Tester.
Senator Tester. Let us follow on with that conversation,
and that is, if private insurers are allowed into the
marketplace, then we have a bill to do that. And they take up
the lowest-risk policies and leave you with the highest-risk
policies. And I know you said that the more people insured, the
better. Doesn't that put your NFIP in a greater risk situation?
Mr. Wright. Whatever we do down this line needs to be
measured in terms of what it sees to go forward. Ceding some
space to the private markets, which has been--and I know that
you have advocated for that in your bill--there are a lot of
folks who do not have the coverages they need. And so I will
approach the entry, or expansion because they already exist in
the market today on the private sector side from a mutual gain
theory, as long as we mutually gain.
What I have to see us guard against is a point by which
they start culling through my book, which is why I looked at
the new risk and said if we are going to give some space, let
us give it on the new side. What I do not want them doing is
arbitrarily culling through the book, taking the lowest risk,
and leaving us--we are already the residual market. We would
move to the insurer of last resort. And at that point, Mr.
Tester, I am convinced we would be in a position by which we
would require infusions of cash every single year.
Senator Tester. So--and if you do not today, I would not
expect you to have--do you have any recommendation on language
that could prevent that kind of culling through the books?
Mr. Wright. So I can follow up with you. I think one of the
elements has to do with what we do with the ``noncompete
provision'' that is in our current arrangement. Some people
misunderstand this. Agents have no prohibitions. The only
people who sell policies are agents, and they can sell whatever
product they want to sell.
Senator Tester. Yes.
Mr. Wright. What we say to the Write Your Own's, frankly,
the way any business would work, is you have all of our
proprietary data; it is covered in our instance, because we are
a Government program, under the Privacy Act. You cannot
arbitrarily cull through that and say we want to take one-third
of the policies and shift them off the book because you have an
insight that no one else has.
Senator Tester. Got you. OK.
You talk about an on-time, multiyear reauthorization. I
assume you are talking 5 years, or are you talking a different
number?
Mr. Wright. Senator Tester, multiyear is what matters to
me. You know, I look at the kind of complexity of this that
sits in front of us. Multiple years.
Senator Tester. OK. So the recommendation from NFIP is you
do not really care if it is 3, 5, or 7, just so long as----
Mr. Wright. As long as we have multiple years. We need to
see consistency in the marketplace.
Senator Tester. All right.
Mr. Wright. The last time, Congress did some work in 2012,
came back in 2014. I am less concerned about that than in
showing there is stability in the marketplace.
Senator Tester. OK. You also talked about pricing risk, and
a lot of that risk pricing deals with maps. We have gotten a
lot of feedback on the accuracy of the maps from the people who
live there in different places, and maybe some of them are
wrong, but some of them are probably right, too.
Do you guys have any idea on how accurate the maps are at
this moment in time as far as your ability to price risk? Are
they 10 percent accurate, 90 percent accurate, or 75 percent
accurate?
Mr. Wright. So I believe that the maps today are credible.
In 2014, you all directed us to work with the Technical Mapping
Advisory Committee to look at this, and last fall, the
Administrator of FEMA certified the credibility of the product.
There is an open question related to precision, which I
think is where you are going with this.
Senator Tester. That is correct.
Mr. Wright. And precision comes down to how much can we
afford to buy. It is a resource question. Precision costs more
money. So what we have tried to do is collaborate with
communities, ensure that we are getting the data from them so
that we are not duplicating any effort, and continuing to build
on this. I am convinced that the technology can help us, but
one of the predicates on that requires us to have digital
elevation data in all of these all across the country.
Senator Tester. Very quickly so I do not not obey the
Chairman, but the map revision process for communities, are you
happy with that? Is it timely?
Mr. Wright. So the map revision process can and needs to go
faster.
Senator Tester. Yes.
Mr. Wright. But let me nuance it down two lines. I am
particularly looking--I think we should work with the Committee
on this. When a community is submitting data and it is
submitted and it goes through the early processes without
objection, I would like to see us hit the accelerator on it.
Senator Tester. OK.
Mr. Wright. I want to be careful not to remove the due
process, because a community may think this is a good idea, but
an affected property owner wants to be able to appeal. We have
got to hold that tension together. But when the community is
bringing me the data, we do not see objection, we should hit
the accelerator.
Senator Tester. Thank you, and I apologize, Mr. Chairman.
Chairman Crapo. That is all right this time.
Senator Scott.
Senator Scott. On behalf of Senator Tester, I will yield
back 21 seconds before I am finished here. Do not worry.
[Laughter.]
Senator Scott. Mr. Wright, thank you for being here this
morning, and my question really does piggyback on Senator
Tester's and your conversation around technology, where we are
and what kind of technology are we using today, what kind of
technology are we going to, and how will that technology open
the door for the private sector to become, the private insurers
to become more involved in it. Because as I look at the State
of South Carolina, we are in desperate need of remapping, and
you are going through that process, which, of course, causes
consternation and challenges as well.
Communities like Beaufort County, where Hilton Head is--
most of us know where that is--has not been remapped in about
20 years, which is consistent, I think, throughout the State.
The 1,000-year flood that we had in 2015--and I will say
that FEMA did a pretty darn good job, so thank you for your
participation and your assistance during that challenging
storm. The reality, however, is that most of us would assume
that in South Carolina the coastal exposures received a lot of
the pain and suffering, when, in fact, as you know, the inland
communities--Florence and Columbia because of the dams that
were broken and other situations--challenged folks who never
heard the words ``flood insurance'' from their agent----
Mr. Wright. Right.
Senator Scott. ----because there was never a thought that
it would be needed. I think about the same situation in
Louisiana and around the country where the flood impact is now
in areas that are likely not mapped for it, perhaps impossible
to do so, but if we are going to have more private insurers
coming into the market hopefully to help reinforce the market,
and we are going to have better predictions on where the
possibility of the impact will be, the last few storms suggest
that we have some ways to go, or perhaps it is just not
possible at this point to get there.
Mr. Wright. So there are maps under development, and so in
the case of South Carolina, we pass 100 percent of those funds
directly to the State through a Cooperating Technical
Partnership, and they provide the leadership on the ground for
this. So even in Beaufort County, those maps are in draft and
working with the community, but they are not yet in effect.
Let me talk about the inland piece, and let me go to
technology. From an inland perspective, you are absolutely
right. It is interesting. I talk to the folks on the coast, and
they go, ``Well, we survived this.'' I am, like, ``Whoa, whoa,
whoa. What you survived is not what the communities in Florence
and Columbia and others did.''
From an insurance perspective, it did go well beyond the
high-hazard area that was mapped, but I would tell you we had
an insurance problem inside the high-risk area, way too little
participation and penetration.
Senator Scott. Always do.
Mr. Wright. And particularly in the neighborhoods that I
was in. I know that you traveled through that area as well. A
lot of these were renters, so they were landlord-owned. And so
I look at the renter side of the equation. Only 1 percent of my
book is sold to renters. And how do we help them understand
that for $100 or $150 they could have an amazing amount of
coverage so that they could rebuild their lives?
To the technology point, when you do a map, you have got to
have a ground elevation; you have got to know how much water is
going to come and how deep it is going to be. And then,
finally, how does it interact with the built environment? We
have to have good, solid ground elevation data. We do that with
LIDAR technology. Frankly, we need that across the country, and
right now we buy that in piecemeal. But if we had that combined
with where the structure locations are--and we are making
progress there, but not fast enough across the country. I think
technology takes a much larger bump. At that point we could
literally have people with their smartphones showing us
pictures of where their base floor is. We could write it in a
much simpler way. I do agree with Senator Menendez we need to
have a simpler product than we have today. It is far too
complex, and technology helps us get there. But technology even
helps meet the point of the claim. High-end claims still need
an adjuster on the ground, but if I am looking at a wet carpet
style claim for $10,000 to $15,000, some pictures taken in an
app on your phone is absolutely sufficient for us to be able to
move.
Senator Scott. Having sold flood insurance for a while, I
thank God that I no longer sell it. But it was an important
part of what we did for a living, and trying to find a way to
mitigate the concerns of the average person in the average
place in the country, and specifically in South Carolina, is a
troubling task for the private sector.
Mr. Wright. Yes.
Senator Scott. Socioeconomic impact, a lot of folks think
about Hilton Head, Kiawah, many of the coastal exposures, and
think about the colossal palaces built on the coast. The
reality of it is that there are a number of heirs property
where you have small structures with folks who simply cannot
afford--since Tester has left, I am going to reclaim my 21
seconds--any real increases in flood insurance.
Is there a method to measure and/or compensate for the
socioeconomic areas or no?
Mr. Wright. So today under the act, I do not have any
authority to look at socioeconomic impacts. As we look at the
affordability study that I was asked about a bit earlier, we
are looking at these dimensions. We will be able to bring more
information forward to you.
Senator Scott. Thank you.
Chairman Crapo. Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman.
As you know, by statute FEMA is required to reevaluate the
flood insurance maps every 5 years. What is the percentage of
maps that are actually redrawn every 5 years?
Mr. Wright. So at the 5-year piece, we do an evaluation of
them. In many cases we find that they are sound and can be
maintained. At other points the investment needs to be made.
Senator Schatz. Are you reevaluating all of the maps every
5 years?
Mr. Wright. We are doing that evaluation every 5 years. The
flip side of this goes to the mapping side. Once I know that, I
then have to have the resources to invest. Today about 59
percent of the stream miles meet standards. So once we get to
that point, I have got a gap that I need to fill.
Senator Schatz. So 59 percent are meeting your standard, 41
percent need----
Mr. Wright. Require additional investments and engineering
and analysis, yes, sir.
Senator Schatz. OK. And you are saying that the map--the
maps are credible but not precise. Is that correct?
Mr. Wright. Yes, sir.
Senator Schatz. What does it mean to be credible but not
precise?
Mr. Wright. So we have a way, given what we know about the
ground elevation, given what we know about the amount of water
and where the structures are, we draw a map. We start looking
at things structure by structure by structure, and there is a
level of precision when they do that radar-based elevation. And
we have some parts of the country where, you know, 6 inches
means you are in or you are out, and many of these kinds of
pieces start getting into I want you to know that my ground
floor is actually 3 inches, 6 inches higher than what we were
able to do in our watershed-based analysis.
Senator Schatz. And in the big picture, obviously, the more
precise, the lower the risk, and the better the risk pricing
is. Is that correct?
Mr. Wright. The more precise is actually going to move
people in and out, so when you get to----
Senator Schatz. Sure, there will be winners and losers for
sure.
Mr. Wright. Precision increases our ability to address the
concern about exactly who belongs----
Senator Schatz. To price risk accurately.
Mr. Wright. Yes, sir.
Senator Schatz. And what you are saying is it costs money
to do the redrawing of the maps.
Mr. Wright. Yes, sir.
Senator Schatz. And that is something that the Committee
has to authorize and then has to be appropriated? How does that
work?
Mr. Wright. Correct. So in the current--based on the 2012
authorization, Congress authorized $400 million a year; that is
paid in a combination of appropriated dollars and fee. Today,
or at least in 2016, there were--$311 million was as much as we
brought.
Senator Schatz. So your current funding allows you to do
about a little less than two-thirds of what needs to be done.
Mr. Wright. Yes, sir.
Senator Schatz. OK. And according to the American Action
Forum, of the approximately 1.5 million structures in the
special flood hazard areas that are required to have flood
insurance, almost half are not in compliance with the law.
First of all, do you agree with those numbers?
Mr. Wright. So as we look at this element, there are a lot
of data regarding how many structures are or are not under the
mandatory----
Senator Schatz. Well, let me ask the question this way:
What is your estimation of the rate of compliance?
Mr. Wright. So I have seen reports from 35 percent to 55
percent in terms of the compliance. It varies different places
across the country.
Senator Schatz. Is it your job to get that number up?
Mr. Wright. Sir, I do not under the act have the
responsibility or authorities related to mandatory purchase.
Those belong to the lending regulators, including the Office of
the Comptroller of the Currency.
Senator Schatz. OK. And I am sure you are aware the number
of billion-dollar disasters has grown significantly in recent
years, from an average of fewer than 3 per year in the 1980s to
15 last year. As you know, FEMA does not have the luxury to
pretend climate change does not exist because it deals with
consequences on a daily basis. Without getting you into a
political conversation, how does the NFIP account for sea level
rise and the increased severity of storms that are coming with
climate change?
Mr. Wright. Thank you for the question. We have
responsibilities and authorities under both the Stafford Act as
well as the National Flood Insurance Act to concern ourselves
with future risk. Climate is one of those. I would also point
out the continuing development in the built environment also is
part of that risk. Those authorities are very plain, and they
continue to be ones that we implement.
The Technical Mapping Advisory Committee brought me a
series of recommendations related to future risk last year.
Some of them require new science to frankly be developed, but
we are beginning to make progress on that.
I would draw the distinction, though, on future risk,
whether it is climate or through changes in the built
environment. We only charge premiums based on today's risk. I
do not charge someone a premium based on a risk they will not
experience for 20 years. But the other side of the program has
to do with land use, and the point by which future risk needs
to be absolutely taken hold of says we are building today
knowing that these risks continue to change, and we expect them
to grow in some particular areas. We should be building higher
and stronger every single time so that those who live there,
those who own those homes going forward, will be able to
withstand whatever comes their way.
Senator Schatz. Thank you, and I will just add that with
respect to the built environment, point taken. With respect to
climate change, it is both a current and a future risk at this
point.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Heller.
Senator Heller. Mr. Chairman, thank you. And, Mr. Wright,
thank you for being here also.
A quick question. How familiar are you with the current
flooding situation in Nevada?
Mr. Wright. I am familiar with what has played out in
recent weeks, both up in the Carson City area, particularly
there in that whole western part around Reno.
Senator Heller. Thank you. We have four counties right now
that have submitted for Federal help and have received it from
the Administration. We are certainly appreciative of it. We
have had 200 percent precipitation after 5, 6 years of drought.
It is kind of nice to see it. We would wish that, you know, it
would not come all at once, but it did and we are not going to
complain about it. But we have the obvious concerns that are
going to occur.
Last week, I joined with my colleague Senator Masto, the
Governor, and Congressman Amodei on a second request. Are you
familiar with this second request?
Mr. Wright. I understand that a second request is being
reviewed at this point. No decision has been made.
Senator Heller. And I am aware of that also. My biggest
fear right now is going to be runoff this spring. We have got
200 percent snowpack up in the mountains, what that is going to
bring, and if it is unusually warm this spring, you can imagine
the concerns that we might have.
What I guess I need from you is a commitment that FEMA will
be proactive in helping these Nevada communities as they
prepare for flooding soon.
Mr. Wright. In much the same way as we did for the events
in the prior weeks, we will be there. We will partner with the
Governor in terms of the requests that come this way. My
brother lives in Carson City. I saw the pictures from this last
piece, the water literally coming down the road. It is clearly
a place by which we need to cooperate with those local
emergency managers, but also for those who have flood
insurance, I want to make sure that there is timely payment of
any claims that come in for those----
Senator Heller. That was my next question, the commitment
for those timely payments to these local communities.
Mr. Wright. Absolutely. And so the kind of changes we have
made to push out advance payments early to them so they have
early dollars on the ground, and the commitment you can have
from me is as we see those pieces coming forward, we will stay
in touch with you and make sure that all the needs are met.
Senator Heller. And I appreciate those comments. We have in
northern Nevada a combination of Reno, Sparks, Washoe County,
and the U.S. Corps of Engineers, they have been working on a
flood control program for the Truckee River as long as I have
been here in Congress. And it is progressing, but obviously
funding is the mechanism by which they can complete that
particular project.
Obviously, the U.S. Corps of Engineers plays a major role,
but how can FEMA provide more mitigation, financing resources
for community-level flood control projects?
Mr. Wright. So there are two separate lines on this. When
we are looking at projects the Corps of Engineers is authorized
to do, without violating the duplication of programs, I cannot
commingle with them. Congress has to appropriate those dollars
and move them forward. There are other projects in the affected
area, and we do have grant programs that the States can avail
themselves to specifically related to flood mitigation. But if
it is that specific larger-scale project that the Corps of
Engineers is doing, I can only work through their appropriation
lines.
Senator Heller. All right. Mr. Wright, thank you very much
for your time. Thank you for being here today.
Mr. Chairman, I will turn it over.
Chairman Crapo. Thank you, Senator.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Thank you, Mr.
Wright, for your testimony.
I want to talk a little bit about the Flood Insurance
Program through the lens of a really bad flood not far from
here in Ellicott City, Maryland--not a coastal area, an inland
area. And the title of an article that came out after the flood
last summer was, ``Flood insurance woes push Ellicott City
businesses under heavy water.'' And it documents a number of
scenarios. One are the people who did not buy flood insurance;
they thought it was too expensive. But I want to focus on some
that did buy either flood insurance or thought they were
covered by other insurance.
Some that bought flood insurance say that the companies
were reneging on their promises, shirking claims, and offering
limited coverage, leaving many small businesses unsure of how
they will recover from uninsured losses that are in the
thousands of dollars. These are small businesses on Main Street
in Ellicott City.
One person in particular, Robin Holliday, who is the owner
of HorseSpirit Gallery, which is a fine art gallery, said she
had been duped by her flood insurance provider. She purchased a
policy that covered $150,000 in damages, but the company only
covered $2,500 for art damaged by the flood.
A couple questions. One, where is the recourse for one of
these people who feels that they have been totally taken
advantage of? Is it through the State insurer? Is it through
you? Is it a combination? How do we make sure people get
recourse without people pointing fingers at one another?
Mr. Wright. Absolutely. So a very deep flood in the
historic section of Ellicott City. We had about 70 insurance
claims that were filed with the National Flood Insurance
Program. We talked a bit earlier about the private markets, but
I want to touch on this because many businesses buy their
coverage on the private market, not from me. And so the first
thing we have got to find out is: Was it through the National
Flood Insurance Program? Or did they buy this through their
broader commercial policy?
That said, we stood up an improved appeals process last
year. To the degree that they are not satisfied with the
adjudication of that claim, they have rights to come into our
appeals process and have that absolutely reconsidered.
Senator Van Hollen. Good. We are going to want to work with
you on that.
Now let me ask you about business interruption insurance
because, as I understand it, the current Flood Insurance
Program does not cover that. Is that correct?
Mr. Wright. That is correct, sir.
Senator Van Hollen. And there are a lot of people who they
may not have flood insurance, but they bought this business
interruption insurance in the event that their business is hit
by a catastrophic event. And just to quote somebody who had
major losses as a result of that, the owner of the Southwest
Connection and Fudge Shop, again, on Main Street, found out
that that business interruption policy would have covered civil
unrest, it would have covered fire, it would have covered an
earthquake, but it did not cover flood.
So my question to you is: In order to avoid confusion,
should we consider allowing you, through the Federal insurance
program, to offer some kind of product with respect to business
interruption insurance? And would that not, number one, protect
people who thought that they were covered? Because there is a
lot of confusion here. And could it also maybe help you
increase your pool?
Mr. Wright. So I absolutely think--and this goes--that we
need to explore this. Today the act requires me to list all the
terms and conditions of the policy, standard flood insurance
policy, in the Code of Federal Regulations. My agency is not
fast to do rulemaking. On average, it takes 7 years. And so one
of the steps we could do through reauthorization is remove the
requirement for me to have all the terms and conditions in
regulation. It still should go through a public process and be
transparent. But that would open up these opportunities, and we
can look at any other kind of barriers so that we can offer the
coverages people want.
I think as we look at this, when too many people are not
covered--and we saw much of that in Ellicott City. But when
people do have the coverage and they do pay for that, it is the
kind of piece by which we should offer them on an actuarial
basis the coverage they want.
Senator Van Hollen. I look forward to working with you on
this, Mr. Chairman, because as you can imagine, there are a lot
of people who they have been paying their premiums, and then,
you know, disaster strikes. They say to themselves, ``Hey, you
know what? This is why I have been paying these premiums day in
and day out for my business interruption insurance,'' only to
discover that that is not covered. And it would be very helpful
and avoid a lot of the confusion if we could work with you so
you could provide that kind of product.
Just a comment with respect to the intensity of weather
events and costs driven by climate change. I would say that in
my State of Maryland, Mr. Chairman, in Annapolis, we have the
Naval Academy. We had a hearing there maybe a year and a half
ago, and the superintendent of the Naval Academy, the Admiral,
testified about much increased flooding in Annapolis that was
causing more severe damage to his facility, which he
attributed--this is the Admiral--to climate change and the
intensity of weather events such that we have been seeing.
So I would point out and I think you know, Mr. Wright, that
a lot of actuaries are now talking about the importance of
costing in the impact of climate change, and it sounded to me
from your answer like you are taking into account those costs
and those risks. Is that the case?
Mr. Wright. We do take into account the future expected
losses. For me--and part of this was the nuance I was trying to
drive--you highlight a place--and we see this play out in
places like Annapolis where they are having sunny-day flooding
that are playing out for them. Those kinds of pieces absolutely
demonstrated in the maps, brought into the cost.
There are risks that have not yet been realized. Those are
the kind that we try to do through land use, hoping to ensure
that people are not there or they are built higher and
stronger, rather than waiting until the day that we have to
raise their premium.
Senator Van Hollen. Thank you. Just to Senator Schatz's
point then, those costs you are already seeing them obviously
in places like Annapolis.
All right. Thank you, Mr. Chairman.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. I apologize for being
late. We have a competing Senate Armed Services hearing that I
am bouncing to and from.
Mr. Wright, thank you for being here. In North Carolina, we
had the Matthew event not long ago and other water events that
have really demonstrated the challenges that we have around
trying to mitigate the future risk of flooding in the urban
areas and rural areas across the State. Could you talk a little
bit to me about what we should--what you would like for us to
do or what the Department or what FEMA is going to do to
possibly increase some of the work that would come under ICC,
particularly in communities where we are trying to go into
Fayetteville where we have got a clear indication of threats
after Matthew, and in Mecklenburg County, what more we need to
do there? I know when you were asked the question over in the
House committee, you were saying, ``It sounds like a great
idea. I would need more revenue.'' But has there been any work
done to project what the long-term savings may be if we were
able to make that investment?
Mr. Wright. So we have not fully studied the various
increments of increase. So the increased cost of compliance is
a mini-grant program inside an insurance program that we run.
It is 30,000 today. It does not--and this is very clear to us.
It does not cover the full cost of elevating a home to bring it
into compliance. It is simply assisting with that.
For me, this goes down to should we continue to view it as
a grant program or should we view it as an insurance provision
the way that laws and ordinances coverage might look. Clearly,
for the homeowner that lives there, that kind of investment
would not only raise the value of their home but ensure that
they could withstand the----
Senator Tillis. What about an instance where maybe a local
county is trying to acquire property that does not have a
building on it to basically--to reduce the risk of any sort of
flood damage when and if that particular property is flooded in
the future?
Mr. Wright. So I would not view that one through the
increased cost of compliance, but I would look at in terms of
the other grant programs we offer through flood mitigation and
the like. We have partnered--I think Charlotte-Mecklenburg is
actually held up as one of the best examples in the country in
terms of what does it mean to acquire property. Essentially,
how do you make room for the river as a way to mitigate those
future losses?
Senator Tillis. I would like to talk a little bit about
your IT modernization projects within FEMA and then also talk
about what you would consider to be the best way to get the
topological data that we need going forward in terms of
mapping. You are probably familiar with North Carolina. We are
using different kinds of techniques to do mapping, LIDAR being
one of them, versus the traditional send a surveyor out and
capture data. So it is a two-part question. One, let us just
talk about your general IT modernization. The other one is
maybe increased collaboration with States and different
techniques getting the information we need to have a better
handle on the future risk.
Mr. Wright. So on the IT modernization piece, let me go to
my insurance operations dimension. We continue to use a
mainframe, and so we have kicked off--and have done a lot of
reviews over the last 2 years. There had been a couple of
attempts at modernization that had not produced the successes
that were necessary. We have changed our approach on this, and
recently we were given approval last fall from the Department
of Homeland Security and Office of Management and Budget to
proceed. Rather than do the big Waterfall overflow, we are
doing an Agile Development Process, and the first couple epochs
will begin to come out this spring, starting with data
analysis, but then we will move to the financial dimensions and
the like.
On the technology related to mapping, the LIDAR-based
technologies that are used in the State of North Carolina are
the only technologies that meet our standards any longer, so
there are no surveyors going out and doing metes and bounds.
North Carolina has been a leader in this space. In fact, John
Dorman chairs my Technical Mapping Advisory Committee, and many
of those kinds of pieces have been adopted over the last
decade, and he has advocated for those in the recommendations.
The related element I would highlight, though, is--and we
saw this in the Matthew event--the best maps are important
input, but we then need to translate that into insurance
uptake, because as we saw, far too few have the insurance they
need, even those that were in the identified areas for the
highest risk.
Senator Tillis. Thank you.
Thank you, Mr. Chair.
Chairman Crapo. Senator Heitkamp.
Senator Heitkamp. Mr. Chairman, I see my colleague Senator
Reed is here. I know they have an important hearing. If he
wants to go ahead of me, that is OK.
Senator Reed. I thank the Senator very much. Am I
preempting anybody else? Forgive me. Thank you. You are
incredibly gracious. No, we are not.
Thank you, Mr. Wright, for your testimony. Thanks for
coming up to Rhode Island last year. You did a superb job.
One issue that is very important is mitigation to avoid
some of these costs. We have been thinking about a program that
is similar to the Clean Drinking Water Act Revolving Fund where
States would be able to have the ability to lend out to
homeowners and to properties to mitigate under the supervision
of FEMA. But just in general, can you talk about mitigation and
how it plays a role in the Flood Program?
Mr. Wright. Absolutely. So the mitigation investments are
clearly the way that we buy down these risks across the
country. You know, we have had studies in the past, a dollar
invested has a $4 return.
FEMA uses three different programs. Today one of them is
directly tied to the Stafford Act post-event. The second one is
a pre-disaster one. And then I have one called ``Flood
Mitigation Assistance'' that we do that is funded by
policyholders. The hard part about mitigation is we all know
that higher and stronger is better. I want to see more
neighborhood-scale mitigation play out. Yes, we need to do the
individual structures, but what does it mean to see a community
and how do we define ``green and gray infrastructure''?
And so this idea related to some kind of revolving fund, we
would have to see the details of that. But I think it is those
kinds of elements as we look at infrastructure investments
across the country; we have got to find ways to ensure that
those investments are made in a way that a community scale
really buys down this risk.
Senator Reed. And you said what is one of the magic words
these days, ``infrastructure.'' So you would see part of any
infrastructure plan that we would agree with and move forward
as including flood mitigation as an important infrastructure?
Mr. Wright. It would be premature for me to speak to
specifics related to an infrastructure plan. That said, I do
think as this is being developed, it is an important element
related to whatever investments we make related to
infrastructure. We should do them expecting them to provide
service and protection for the next 50 to 75 years, and we
should take all that we know about the science related to
future risk. I particularly pay attention to the flooding side
as well as the seismic dimensions in those parts of the
country.
Senator Reed. Thank you.
You testified last week about support for flood risk
disclosure. Could you give us an idea of what things should be
disclosed?
Mr. Wright. So today most States require disclosure at the
point of sale, and I was asked in the House hearing a bit about
this, and I demur a bit because I really do think this is
something that States are best positioned to understand and
govern. I do not have the ability to an enforcement element.
That said, when someone is purchasing their home, they
should know what the risk of flooding is. They should know what
their earthquake risks are. They should have the risks related
to a dam or levee that may fail. I just think that we are best
positioned to do that in a way that collaborates with the
States and the communities who understand that best.
Senator Reed. But the risk disclosure should be broad, not
just narrow, not the 100-year but the 500-year----
Mr. Wright. I would agree.
Senator Reed. Yes, thank you. And just a final point. The
National Flood Insurance Program does a lot more than just
reimburse people for damage.
Mr. Wright. Yes, they do.
Senator Reed. They do floodplain mapping assistance; they
do mitigation assistance, as you pointed out, because it is the
premiums that are paying for what you are doing, oversight, et
cetera. Sometimes there is discussion of just substituting the
Federal plan with private insurers. How do we do that and still
maintain the ability to do these other activities?
Mr. Wright. Well, I think as we look at this--and I have
seen a couple proposals. I do not have a specific one to make
today. But I will tell you that I look at the investments that
are made into mapping, into floodplain management, into the
grant programs. And over the last 25 years, billions of dollars
have been paid by policyholders. To the degree that other
markets are taking that, I do believe we need to very carefully
consider how they would benefit from what is now a public good
and how those bills should be paid.
Senator Reed. Thank you very much, and let me again thank
Senator Heitkamp for her extraordinary generosity. Thank you.
Chairman Crapo. Thank you.
Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman. And, Mr. Wright,
thank you for your appearance before us today to talk about how
we can fix the Flood Insurance Program.
Like many other Federal programs, I think the Federal Flood
Insurance Program was started with the very best of intentions.
Farmers and other Americans of limited means who could not
afford private insurance could use a helping hand. Today,
though, this program also helps many of them stay out of
bankruptcy when disaster strikes, and that is a good thing. But
it is time to acknowledge some hard truths. It is $25 billion
in debt. And while the program does help some Americans with
moderate incomes, as well as farmers, it also takes money from
working-class Americans to subsidize beach homes for the rich.
In one wealthy Massachusetts town, 150 properties received
$60 million in payouts over time. That works out to about
$400,000 each. A single $1 million home has been rebuilt 10
times, so we are not talking here about the poor or the
downtrodden. If you can afford a $1 million beach estate in
Nantucket, you do not need middle-class workers to foot the
bill for your flood insurance. You should be buying your own
insurance with your own money from a private insurance company.
In fact, if the Government was not offering such lavish
support, there would be private plans to choose from. But
because the Government program can run up billion-dollar
deficits, it is difficult for any private insurance company to
compete. No private insurer has access to the unlimited credit
line known as the U.S. Government.
So, Mr. Chairman, I agree that we need to work to fix this
program on behalf of fairness, on behalf of efficiency, and on
behalf of hardworking taxpayers who pay into this program every
year and do not get value for their dollars.
Mr. Wright, the program is spending $25 billion more than
it is taking in. It is fair to say it is subsidizing
homeowners. Is that correct?
Mr. Wright. There are subsidies and grandfathering that are
provided for under the statute.
Senator Cotton. And there is no cap on the value of a home
that can get a Federal policy. Is that right?
Mr. Wright. That is correct.
Senator Cotton. So you can get a plan no matter how much
money you make?
Mr. Wright. There are no income-based thresholds under the
Flood Insurance Act.
Senator Cotton. You can get a home no matter how rich you
are?
Mr. Wright. There are no economic elements in the National
Flood Insurance Act for me to discriminate.
Senator Cotton. You can get a policy no matter how
expensive your home is.
Mr. Wright. We are capped at the amount of coverage we
would offer. We would only offer $250,000 worth of coverage.
Senator Cotton. But that is a cap on the value, not a cap
related to the overall price of the home?
Mr. Wright. Correct. But it caps how much I would pay back
to them.
Senator Cotton. So if you are a rich billionaire who has a
beach home, then you can get a coverage policy from the Flood
Insurance Program for the first $250,000, and then surely you
would buy private insurance for the remaining value of your
home. Is that right?
Mr. Wright. Presumably so.
Senator Cotton. Is there any reason that rich billionaire
could not buy private insurance for the first $250,000?
Mr. Wright. If they would like to avail themselves of the
private market, they could do so.
Senator Cotton. It seems they would have the means to do so
if they can afford the multimillion-dollar beach home and the
private coverage over the $250,000 cap, wouldn't they?
Mr. Wright. It seems reasonable.
Senator Cotton. You state in your testimony that private
insurers are gaining increasing interest in offering such
insurance. Is that right?
Mr. Wright. Yes, sir.
Senator Cotton. Do you think that there is some tendency
for private insurers to be crowded out of the market by the
National Flood Insurance Program, which can run a $25 billion
deficit?
Mr. Wright. I do not know that we are crowding out. I think
there are a lot of properties that need the insurance that do
not have it. And so as I said earlier, I think a mutual gain
approach on this is one by which we could all collectively
benefit. We do need to make sure that we do not create an
environment by which we cull off the cheapest risk in my book
so that I would require an infusion of cash every single year
because I am left simply as the insurer of last resort.
Senator Cotton. I think we can all agree that we would not
like to see an infusion of taxpayer cash repeatedly into the
program, that we would like the program to focus on those
Americans who need it most or who are most financially
vulnerable and who live in places that may not be as pretty and
scenic as America's beautiful beaches, but not subsidize rich
billionaires and their beach homes to the extent that we are
doing now.
Thank you, Mr. Wright. Thank you, Mr. Chairman.
Mr. Wright. Thank you.
Chairman Crapo. Thank you.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman. A couple quick
questions.
Obviously, we are concerned about flooding in the northeast
corner of my State. Drayton continues to struggle with the
order from FEMA to take down the levee. They have sent you a
request. Have you acted on that?
Mr. Wright. I understand that the request has arrived at
FEMA. We have not taken action yet on it.
Senator Heitkamp. And when can I expect that action?
Mr. Wright. So right now I am looking--we need to read
through that. We have another month in terms of the period of
time that is in front of us. And as I discussed with you
earlier, I also need a sense of what the solution is that is
going to follow, and we will continue to collaborate with you
and the rest of the delegation on that.
Senator Heitkamp. Well, there is a famous saying: Winter is
coming, but in North Dakota, spring is coming.
Mr. Wright. Absolutely.
Senator Heitkamp. And if you could expedite the review, I
do not think that we can solve all the problems with that levee
in this review, but, you know, getting an approval or an
extension so that we can assure the people of Drayton that they
are going to have flood protection during what looks like
increasingly will be necessary given their flood situation.
Mr. Wright. And the very clear commitment that I will make
to you, Senator Heitkamp, is we will not be taking any adverse
action while there is any flood fight that is going on.
Senator Heitkamp. But it would be nice to know that in
writing, and so please expedite your review.
The second issue is basement exemptions.
Mr. Wright. Yes.
Senator Heitkamp. Obviously, we have a number of
communities in North Dakota--of the 53 nationwide, 14 are in
North Dakota--where these homeowners have taken extra
precautions to qualify for the basement exemption. We have a
very high water table in a lot of our flood areas.
What is your personal position on continuing the basement
exemption?
Mr. Wright. I think the basement exemption makes sense. I
think that the examples there in North Dakota are a case in
point, and when the maps were updated in those communities,
over the last year, I reissued that exemption.
Senator Heitkamp. Yes. I think we would like to see a
continuing commitment to do that, especially because what we
end up doing is waterproofing those basements and reducing your
risk. And so----
Mr. Wright. I think the current practice makes good sense
in this context. I think there is a narrow set of communities
where this applies. These that you are highlighting are
included there, and I have no interest in changing that policy.
Senator Heitkamp. Terrific. Thank you so much.
Let us get back to private flood insurance because I think
that one of the concerns that I have as we go forward is what
we have been talking about here, which is cherry-picking. But
we do see a desperation from people to try and figure out how
they can lower costs. Whether we can spread the risk beyond the
taxpayers, as Senator Cotton explained, we are, in fact,
subsidizing this program. I think the 500-pound gorilla that we
have not talked about yet in this Committee hearing is: Is
there a political will to continue to subsidize the same way we
subsidize crop insurance for farmers? Will we ever get to--I
mean, if we could ever get to a risk pool that would, in fact,
be broad enough that private insurance could, in fact, enter
the market, make money, and provide the coverage, we do not
need this program. Is that correct?
Mr. Wright. If we were in a position by which flood cover
was included in a homeowner's policy the way that they are in
some other countries, you are correct.
Senator Heitkamp. Have you ever looked at a process whereby
we could cover catastrophic loss, you know, what that would be,
and then leave the kind of day-to-day kind of operations of
flood insurance, you know, up to $250,000 to the private
insurance market?
Mr. Wright. So this is a piece from a historical
perspective that was experimented with. There is an authority
that still exists under the National Flood Insurance Act that
was used up until 1986 by which they did that. The companies do
not appear interested in that, to my knowledge, in terms of
categorically taking over all the first $250,000.
I think that whatever steps we take in this reauthorization
need to put us on a vector, and if that is the choice of where
Congress wants us to go, we can develop it in that way.
Senator Heitkamp. Well, I think that was the choice they
made in Biggert-Waters, but now you see we are all here
screaming that did not work, because when we take the
participation of the Federal taxpayer out of this, what we see
is maps that include more property, and that is probably a
product of what is actually happening day to day, more and more
flooding. But we also see increased premiums. And so at some
point, we have to make a decision in Congress what exactly this
Flood Insurance Program should look like. And I think that your
job would be to present a range of options so that we can best
evaluate which one fits and we can know what the risk is to the
American taxpayer.
I am out of time. Thank you so much, and thank you for your
commitment to Drayton.
Mr. Wright. Thank you.
Senator Brown [presiding]. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
After Hurricane Katrina and Superstorm Sandy, Congress
recognized that it needed to modernize the National Flood
Insurance Program, NFIP, to make it more financially sound. And
now we are about to reauthorize this program, and I think it is
critical for us to remember that NFIP is not just an insurance
program. It is a comprehensive flood risk reduction program
that is comprised of insurance, flood mapping, floodplain
management, and flood mitigation. Each of these four missions
plays an important role in reducing flood risk, and each is at
least partially funded by user fees and surcharges.
Now, by contrast, we have been talking about private flood
insurance; it does not pay any of these user fees and
surcharges, which means that as this market expands, there will
be fewer contributions that will help pay for the flood
mapping, the floodplain management, and flood mitigation.
I support private sector insurance, but only if the playing
field is level for Government insurance and private insurance.
Mr. Wright, do you believe that private primary policies
should include NFIP equivalency fees and surcharges to ensure
that the private sector is sharing in the national costs of
flood mapping and floodplain management?
Mr. Wright. Thank you, Senator Warren. I absolutely think
that requires consideration in this reauthorization.
Senator Warren. I did not ask if it required consideration.
I asked if you think that is what we ought to do.
Mr. Wright. I think it has to look at what the
implementation would look like. It would require us to work
across 50 insurance commissioners. So the implementation side I
would need to work on, but, yes, these are public goods that
should be paid for.
Senator Warren. Good. That is what I want to know, because
I think that is exactly right.
Now, if the private market significant expands, how will
that affect NFIP's ability to carry out some of its core
missions?
Mr. Wright. So to the degree that the private market
expansion comes by a mutual gain--because there are millions of
structures at risk that do not carry the insurance today. As
long as we have mutual gain, I actually think all of us are
better off. If that gain in the private market comes by simply
culling and reducing my policy base, that is a point by which
the income and revenue goes down, and the concerns you
highlight become realized.
Senator Warren. All right, because I think this is a very
important part of this, that we have got to make sure that we
are still maintaining these other functions, that we have
enough resources to be able to do them. Someone has to pay for
fund mapping and for plain management, and over time letting
private plans crowd out Federal plans and at the same time skip
out on the bill could destroy this funding. And I think that is
a bad idea.
There have also been recent media reports that President
Trump is thinking of charging flood insurance policyholders to
build his dumb wall between the U.S. and Mexico. Mr. Wright,
this Trump tax on flood insurance would increase the cost of
flood insurance for all policyholders, rich or poor, and do
nothing to minimize flood risk. Is that right?
Mr. Wright. So I am aware of the reporting that you are
referencing. I have not seen the final decisions made related
to the budget, and so I cannot speak to those specifics. I have
got to refer that to the Office of Management and Budget. Once
we have the budget in hand, I would be happy to discuss the
specifics with you.
Senator Warren. Well, OK. I understand that we do not have
the specifics yet, but we changed the law in 2014 because
hundreds of thousands of families said they could not afford
higher payments. And now it appears that at least one of the
options that Donald Trump is considering for paying for the
wall between the United States and Mexico that he wants to
advance would be to do that by raising millions of dollars from
people who are currently paying for flood insurance. So we
would be building this wall at the expense of families who are
already struggling to pay for flood insurance. Isn't that
right?
Mr. Wright. Clearly, I am concerned about the affordability
piece of this, and anything that increases the rates, whether
it is because the actuarial tables tell me to do so or that
these are surcharge have an impact on their ability to retain
the coverage they need.
Senator Warren. All right. You know, this is not the only
dumb idea we have seen for funding this wall. Apparently, the
Administration is also considering slashing funding for airport
security, for port security, and for the Coast Guard. I
understand that the President may be embarrassed that his
ridiculous wall plan is outrageously expensive. And I
understand that he might be embarrassed that Mexico is
obviously not going to pay for it. But Congress should not cut
funding for vital security or raise premiums on homeowners just
to help bail him out on his very bad idea.
Thank you, Mr. Chairman.
Senator Brown. Thank you, Senator Warren.
Senator Cortez Masto.
Senator Cortez Masto. Mr. Wright, good morning.
Mr. Wright. Good morning.
Senator Cortez Masto. Nice to meet you. An hour and a half.
The questions are almost done.
I want to follow up, though. The senior Senator from Nevada
asked you questions about the flooding. Obviously, that is a
concern of mine as well, and I kind of want to put it in
perspective. And I know it is something you are reviewing, but
on March 9th of this year, Governor Sandoval requested that a
major disaster declaration be made for the State of Nevada as a
result of severe winter storms, straight-line winds, flooding,
and mudslides beginning on February 5th and continuing.
The Governor specifically requested individual assistance
for the counties of Elko and Washoe; public assistance,
including direct Federal assistance, for the counties of
Douglas, including the Washoe Tribe of Nevada and California;
Elko, including the South Fork Band of Te-Moak Tribe of Western
Shoshone; Humboldt and Washoe and the independent city of
Carson City; and, three, hazard mitigation statewide.
FEMA indicates that about 40 claims under the National
Flood Insurance Program have been filed so far by Nevada
homeowners. I know you have promised to cooperate with the
Governor, and you stated to my colleague that you would ensure
there is timely payment for claims. But does FEMA yet have a
sense of how many homeowners impacted by the recent flooding in
northern Nevada were National Flood Insurance Program
policyholders?
Mr. Wright. So there are ongoing preliminary damage
assessments that were done cooperatively obviously that will
influence the declaration decision. On the insurance side of
the equation, you have laid out the numbers in terms of what we
have seen so far. We usually hear from people once they are
back in their homes, so I began to see initial claims filed
somewhere around day 3 to 5, and the majority of those claims
are in during that first month. Clearly, anytime during the
first 60 days after an event, they can file a claim. As we see
those numbers change, I will make sure you that you are aware
of that.
Senator Cortez Masto. OK. I appreciate that. And as part of
your analysis, will you also be determining how many homeowners
were not mapped into mandatory purchase areas and, therefore,
may not be insured by the program?
Mr. Wright. So as we look at this in--I keep going between
the two sides of our authorities, the National Flood Insurance
Act and the Stafford Act. So on the Stafford Act side, as we
look in those reviewed in terms of the declaration request, the
uninsured side does come into play on that dimension, and I
know that my colleagues have been working with the State to pay
attention to that.
Senator Cortez Masto. OK. And so for that reason, and just
what you said, can I have a commitment--obviously, at times it
is hard when policyholders are filing claims and it takes time
for them to go through that process--that you would consider
extending the date, as you have done in other----
Mr. Wright. So let look at the progress up to this point,
and if there appears to still be a stream of them coming in, we
will take the appropriate action with the extensions.
Senator Cortez Masto. OK. Thank you.
If FEMA faces cuts under President Trump's upcoming budget,
as we have heard, how might that impact your ability to fulfill
policyholder claims?
Mr. Wright. So it is premature for me to speak related to
the budget. What I can tell you is the claims are paid
specifically out of premiums, and so I have never seen a budget
proposal that has tried to take those premium dollars. Those
are dedicated under the National Flood Insurance Act to pay
claims.
Senator Cortez Masto. All right. So it is safe to say that
my homeowners may not be impacted at all based on the claims
that they made in the flooding that has happened to them. Is
that correct?
Mr. Wright. We signed a contract with the folks who have
flood insurance. It has the full faith and credit of the United
States behind it. We will meet our commitments.
Senator Cortez Masto. Great. Thank you. And then in 2014,
Congress created the Office of the Flood Insurance Advocate to
advocate for fair treatment of policyholders and property
owners. Can you tell me how you work with the Flood Insurance
Advocate to address some of the issues they identified in the
recent reports?
Mr. Wright. Yes. So I appointed David Stearrett as the
Flood Insurance Advocate. He has a whole office behind him. He
has an element of independence that is kept, and so he submits
he reports both to me as well as to the FEMA Administrator. I
get reports and input from him every 60 days in terms of the
throughput of issues that are coming in from a case management
perspective. And then once a year, he has a broader report that
is directed to me and then made public.
You have obviously and your team has looked at those
elements. They particularly highlight ensuring that people get
the refunds that they need. They look to make sure people are
getting the right underwriting costs on the way through.
I will tell you that I find this to be one of the most
important parts of the recent legislation. I think people
having a final place where they can go, where they are
frustrated and confusing dealing with our program, can go get a
fair shake. It is a relief valve that is there. I have found it
very beneficial, not just for the hundreds of folks who have
come through it, but maybe even more important to me, as I look
at my responsibilities across the program, it turns us into a
learning organization. When I get those reports, when I get
those highlighted issues, we go to solve them so that future
policyholders will not have that frustration.
Senator Cortez Masto. Thank you. And I have to run to a
competing committee meeting. Mr. Chair, I have one more
question, with your indulgence.
Senator Brown. Of course.
Senator Cortez Masto. This involves our rural and tribal
communities, because I know in 2012 there was a study by the
Government Accountability Office that noted that FEMA has not
placed a high priority on mapping rural areas, including many
tribal areas, for flood risk; and most tribal lands remain
unmapped. Can you comment on any progress FEMA has made in this
area since the 2012 study?
Mr. Wright. Yes. So it is true that the unmodernized
products are in a rural context, the places where we have not
got those updates maps. So 96 percent of the Nation's
population have modernized products, but that remaining 4
percent is on one-third of the land mass across the country.
And so this is a place that requires resources. We should
finish modernizing those products. We absolutely should, and
that may be something we should look at in reauthorization.
As we work with tribes, we try to do this with a true
appreciation and understanding of the sovereignty that they
have. And so I try to do this in a way where, when they are in
the watershed that is there, we consult with them. We have
authorities to map. We also have authorities about whether or
not they come into the program. And I want to do that in a
collaborative way with the tribal leadership so that they can
avail themselves of all of the kind of support that FEMA may be
able to do--some of this under the National Flood Insurance
Act, some of it under Disaster Relief Fund and the Stafford
Act.
Senator Cortez Masto. So you have a plan to do just that?
Mr. Wright. Yes, ma'am.
Senator Cortez Masto. Thank you.
Senator Brown. Thank you, Senator Cortez Masto.
Senator Menendez.
Senator Menendez. Thank you. Let me thank the Chairman for
indulging and keeping the hearing open, and thank you as the
Ranking Member for staying. I know you have other issues to
deal with. But for over a quarter of a million New Jerseyans,
this is an incredibly important program, so I just have a
couple other questions.
Currently, FEMA can deny funds to repair the foundation of
a structure if it determines the foundation was damaged due to
what is called ``earth movement'' rather than by flood waters.
This is the case even though the flood waters likely caused the
earth movement that damaged or destroyed the foundation. We had
a lot of arbitrary decisions that all of a sudden there was a
denial for policyholders because there was earth movement. But
the earth never moved until the flood came. And so countless
claims were denied, and it led to disparate results since the
determination of whether the damage was caused by flood or
earth movement is unclear and difficult to assess.
Wouldn't you agree, Mr. Wright, that this is an area that
needs a better definition, as technical as it is, because it
seems to have been used arbitrarily and capriciously a fair
number of times?
Mr. Wright. It is a point that would benefit from far more
clarity. Frankly, for me the distinction here is whether or not
it was a preexisting condition to the structure, and so I
acknowledge this ``earth movement'' term causes a lot of
confusion.
When you look at the specifics of how we are directed to
implement this, from an indemnification perspective I only pay
for a claim that was caused. And so if the flood waters caused
any kind of structural movement, we should pay. And if this is
a 70-year-old home that has settled over the preceding 70 years
and has cracks in the foundation that precede the flood event,
well, then I should not pay for that. That is not a coverage
that was included under the standard flood insurance policy.
Senator Menendez. All right. I appreciate that distinction,
but making it clear is going to be critically important because
there are many people who did not have cracks in their
foundations before, but suddenly they were denied based upon
this. So it is something I would like to work on with you all
as we have reauthorization.
Mr. Wright. You have my commitment.
Senator Menendez. I appreciate that.
Now, I am glad to hear that you embrace the independent
advocate. It is something that I helped created.
Mr. Wright. You did.
Senator Menendez. Would it be fair to say that the reforms
that FEMA undertook, both with your predecessor and you as a
result of the appeals process, is something that you would
embrace incorporating into a new reauthorization?
Mr. Wright. So the appeals process that is there is
something that I would embrace codifying. I think that clearly
it was authorities that even go back to 2004 that created this.
The way it was implemented, as I have spoken to you in the
past, was insufficient and did not have sufficient credibility
from where I sat. We made those changes. I think they are
proving beneficial, but codifying that so that any future
person who is leading this program would not be able to change
that basis.
Senator Menendez. I appreciate that, because as a result of
our work in the aftermath of Sandy and the denial of many
claimants, I think we came to a better process and a fairer
process. And it is something that I would like to see
incorporated in the final new legislation.
Let me ask you one last question. The NFIP has borrowed
nearly $25 billion to pay claims for large disasters, $17
billion from Katrina. And I think one of the things we never
mentioned here is the fact that about $10 billion of that debt
was incurred by a cause of the Army Corps' levee failure during
Katrina. So I do not understand why current policyholders
should pay for that mistake. It is the mistake of another
Federal agency that has a tremendous burden on this program. So
it is something to be considered here, because you are now
paying, as I understand it--and correct me if I am wrong--about
$400 million in interest on the debt last year alone, which is
10 percent of the premiums that you receive on an annual basis,
that $400 million paid by policyholders, real people who are
struggling to afford their flood insurance.
Do you not believe that we should be looking at how that
debt is dealt with, especially in the fact that so much of it
is caused by the errors of another Federal entity? How much
would premiums have to increase, for example, in order to pay
down the debt?
Mr. Wright. So there is no practical way for us to pay the
nearly $25 billion in debt. Full stop. If I was to do that with
premium holders, I would have to make an exponential shift in
premiums in order to make that happen. And you are correct. You
know, as we look back, nearly $10 billion of that loss in
Katrina we can attribute to those levee failures. And you are
also correct about the interest, because ultimately I am not
positioned to make principal payments, but I am required to
service that debt.
So I have a generally favorable interest rate with the
Treasury that, combined, about 1.6 percent is what my interest
rate is today. But as interest rates go up, that continues to
be a burden. And it is not just $400 million a year. Over the
last dozen years, we are approaching $4 billion that we have
paid simply servicing the debt. Those are dollars I simply take
out of my premium revenues and transfer. That burden alone is
to the point by which my recent borrowing in January included
borrowing so that I could make my interest payment this month.
Senator Menendez. So, in essence, Mr. Chairman, what we are
doing is we are paying ourselves interest on a debt that we
have largely created in great part by the levee failures, $10
billion right there alone. And so instead of having this type
of money either be invested in the program or ultimately
reducing the debt, we are paying interest to ourselves because
it is the Federal Government, FEMA, paying the Treasury at the
end of the day.
So it is pretty amazing to me that when I borrow--if I lend
myself money and then I ultimately pay myself interest, that
normally does not happen. We are robbing from Peter to pay
Paul, but, unfortunately, it is the policyholders that get
affected here at the end of the day. So I appreciate your
insight to that.
Thank you, Mr. Chairman.
Senator Brown. Thank you, Senator Menendez.
Mr. Wright, thank you for your testimony and your public
service.
All Members of the Committee will have 1 week to send you
letters and questions and more comments, and we would
appreciate it if you would answer those requests and questions
as quickly as possible. And thank you again.
Mr. Wright. Thank you.
Senator Brown. The Committee is adjourned.
[Whereupon, at 11:45 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF ROY E. WRIGHT
Deputy Associate Administrator for Insurance and Mitigation, Federal
Emergency Management Administration
March 14, 2017
Introduction
Good morning Chairman Crapo, Ranking Member Brown, and Members of
the Committee. My name is Roy Wright and I am the Deputy Associate
Administrator for Insurance and Mitigation--responsible for directing
the Federal Emergency Management Agency's (FEMA) risk management,
mitigation, and flood insurance programs. Thank you for the opportunity
to testify about the National Flood Insurance Program (NFIP), including
FEMA's efforts to transform the program in recent years and to request
considerations for Congress' reauthorization of the NFIP before it
expires in September 2017.
NFIP Background
Flooding is the most frequent and expensive disaster in the United
States; 90 percent of natural disasters in the United States involve a
flood. Homeowners insurance does not typically include coverage in the
event of flooding, and historically flood insurance was not widely
available. If it was, it was very expensive. Congress established the
NFIP in 1968, which FEMA's Federal Insurance and Mitigation
Administration (FIMA) administers.
There are four key elements of the NFIP:
Identifying and Mapping Flood Risk: Working closely with
communities, FEMA identifies flood hazards through scientific and
engineering methods. FEMA then maps those hazards on a Flood Insurance
Rate Map (FIRM). The FIRM is used to help communicate flood risk to
communities and the public, and is used for floodplain management and
flood insurance requirements.
Floodplain Management: Floodplain management includes actions that
communities can take to reduce flood damage to both new and existing
buildings and infrastructure. The NFIP plays a role in encouraging
communities to adopt and enforce floodplain management regulations
including zoning codes, subdivision ordinances, building codes, or
special purpose floodplain management ordinances. By law, FEMA can only
provide flood insurance to those communities that adopt and enforce
floodplain management regulations that meet or exceed minimum NFIP
requirements.
NFIP floodplain management requirements are a cost-effective way to
reduce the flood risk to new buildings and infrastructure. Internal
FEMA studies have found structures built to NFIP standards experience
73 percent less damage than structures not built to these standards; as
a result, the standards reduce flood losses by $1.9 billion per year.
Flood Insurance: The NFIP makes flood insurance available for
homeowners, renters, and business owners in for 5.1 million
policyholders in 22,235 NFIP-participating communities in all 50 States
and 6 territories. Seventy-three private insurance companies
participate in the NFIP's Write Your Own (WYO) Program, selling and
servicing NFIP policies under their own names. FEMA also writes and
services some policies outside the WYO Program through NFIP Direct, a
vendor that FEMA contracts with and oversees. The NFIP underwrites, and
bears the risk, on all NFIP policies, whether sold by private companies
or NFIP Direct.
The NFIP functions like other insurance programs, in which
policyholder premiums help cover insured losses. Flood insurance helps
homeowners recover following a flood. For example, following the
flooding in Louisiana in August 2016, insured survivors filed 29,557
claims and, to date, the NFIP has paid more than $2.3 billion in
claims. Conversely, FEMA's Individual Assistance grant program has paid
more than $758 million to more than 82,000 individuals and households.
The average NFIP payment in Louisiana (for the August 2016 flooding) is
approximately $86,500 per policyholder while the average individual
assistance payment is approximately $9,150. FEMA's Individual
Assistance program is not designed to compensate for all losses that a
survivor may have experienced. The NFIP is a far more comprehensive
program to help homeowners get back on their feet. Homeowners should
not rely on potential grant programs to support them following a flood,
as they only provide emergency assistance and are not designed to
repair or rebuild damaged property.
Incentivizing Risk Reduction Through Grants and Premium Discounts:
FEMA manages the Flood Mitigation Assistance (FMA) grant program,
authorized by the National Flood Insurance Act. This program, designed
to reduce or eliminate claims, provides funding to State, local,
tribal, and territorial communities for projects that reduce or
eliminate long-term risk of flood damage to structures insured under
the NFIP. Typical projects may include acquisition of repetitive loss
properties, elevation of buildings, and neighborhood-scale flood
defense investment. One hundred percent of the funding for this program
is paid through premiums on NFIP policies.
The National Institute of Building Sciences' Multi-Hazard
Mitigation Council estimates that for every dollar FEMA invested in
mitigation between 1993 and 2003 (which includes, but is not limited
to, FMA programs), society as a whole saved four dollars due to reduced
future losses. Mitigation programs save the American public an
estimated $3.4 billion dollars annually through a strategic approach to
natural hazard risk management, including the value of more stringent
building codes.
FEMA also created the NFIP Community Rating System (CRS) in 1990 as
a voluntary program for recognizing and encouraging community
floodplain management activities that exceed the minimum NFIP
standards. Any community in full compliance with the minimum NFIP
requirements may apply to join the CRS. More than 1,400 communities
around the Nation participate in the CRS, accounting for 3.8 million
policyholders. Under the CRS, FEMA discounts NFIP policyholders' flood
insurance premium rates to reward community actions that meet the three
goals of the CRS, which are: (1) reduce flood damage to insurable
property; (2) strengthen and support the insurance aspects of the NFIP;
and (3) encourage a comprehensive approach to floodplain management.
Lower flood-insurance rates are just one of the benefits of joining the
CRS; CRS floodplain management activities also provide enhanced public
safety and reduced damage to property.
The Financial Impacts of Catastrophic Disasters on the NFIP
While Congress appropriates funds for flood mapping, FEMA covers
the vast majority of NFIP costs--including operations, floodplain
management, risk mapping, and grants--through premiums, fees, and
surcharges from the 5.1 million policyholders participating in the
program.
Due to the nature of flooding, impacts can vary significantly each
year. After 15 years of lower than expected damages, Hurricanes
Katrina, Rita, and Wilma hit the Nation in 2005. These three
catastrophic events resulted in an annual NFIP claims total eight times
the size of any prior year in the program's history.
As a mandatory Federal program, the NFIP met its commitment to
policyholders and paid all claims as outlined in their insurance
policies. However, to meet these requirements Congress directed the
NFIP to pay for the catastrophic losses through funds borrowed from the
U.S. Department of Treasury (Treasury). By the end of the claims
process for these events, the NFIP had borrowed $17.5 billion.
In 2012, Hurricane Sandy hit the East Coast and resulted in more
than 144,000 NFIP claims. The program paid out an initial $8.4 billion
to policyholders. As a result, the NFIP borrowed an additional $6.25
billion from the Treasury to ensure proper payment of all claims. The
volume of claims in the aftermath of Hurricane Sandy was much larger
than NFIP typically encounters, and policyholders had concerns that
FEMA and WYO companies were not handling their claims fairly. FEMA
subsequently set up a Sandy Claims Review process to contact all
policyholders who had claims and offer them an additional examination
of their claim. The NFIP has since paid out an additional $350 million
to policyholders, and based on this experience, FEMA took steps to
reform key aspects of the program to be more customer-centric.
While there was no single ``catastrophic'' disaster in 2016, the
multiple flooding events in Louisiana, Texas, and several States during
Hurricane Matthew resulted in the third largest claims payout year in
the NFIP's history. Though the NFIP is still processing claims,
projected payouts from 2016 flood events total more than $4 billion. In
January 2017, the NFIP borrowed an additional $1.6 billion from the
Treasury to cover claims, pay interest on the debt, and ensure capacity
to pay future claims. Liabilities to the Treasury now total $24.6
billion and, moving forward, require annual interest-only payments of
nearly $400 million dollars.
It is important to note that the latest private sector catastrophe
modeling demonstrates that none of these events is outside the expected
range of NFIP losses. A single storm that results in a loss to the NFIP
of the size that occurred in Hurricane Katrina ($16.3 billion) has a 1
to 2 percent chance of occurring in any given year, while a single
storm that results in a loss as large as the one that occurred in
Hurricane Sandy has a 4 to 5 percent chance of occurring in any given
year. NFIP losses experienced during an event such as the August 2016
storm that caused inland flooding in Louisiana has a 4 percent chance
of occurring each year. Moving forward, FEMA anticipates having another
loss year like those cited above within the next decade.
NFIP Transformation and Lessons Learned
Following Hurricane Sandy, FEMA has taken steps to transform the
NFIP customer experience and improve oversight and engagement with WYO
companies.
FEMA designed and implemented a new appeals process to improve
customer service and transparency to policyholders. The Agency
established an Appeals Branch in the Policyholder Services Division,
which remains independent from the Product Delivery Division that
oversees the claims process.
FEMA also improved its oversight when WYO companies respond to
litigation to ensure that policyholders are treated fairly. FEMA
established the Office of Chief Counsel WYO Oversight Team. This team
works with FEMA's Industry Management Branch to enhance FEMA's
oversight of the WYO program and WYO litigation to include oversight of
expenses and implementation of a national legal strategy for flood
insurance claim litigation with an emphasis on early alternate dispute
resolution. Further, FEMA removed the NFIP's Financial Assistance/
Subsidy Arrangement with WYO companies from regulation. It is no longer
necessary to include a copy of the Arrangement in Title 44 of the Code
of Federal Regulations. This process was time-consuming and created a
delay to make any administrative updates or changes in regulation. Now,
the process is streamlined to improve the ability of FEMA and its
industry partners to negotiate operational adjustments and corrections
more quickly and efficiently.
The NFIP has also implemented changes to take a more proactive role
in disaster readiness and response. During recovery from the Louisiana
floods and Hurricane Matthew, FEMA successfully executed components of
the new Flood Response Playbook to support insured survivors,
including:
Issuing advance payments to policyholders of up to $10,000
while the NFIP processes their full claims;
Coordinating with State insurance commissioners and WYO
companies to ensure the NFIP meets policyholder needs;
Deploying FIMA staff to directly support field operations;
Providing analytical support to assist FEMA operational
leadership in making resource decisions; and
Proactively communicating with WYO insurers and with
policyholders through disaster-specific bulletins, webpages,
and fact sheets.
In 2016, the NFIP made more than $4 billion claim payments to
83,000 insured survivors. This major year of flood losses highlighted
the success of recently implemented NFIP reforms, as well as the
importance of continuing to improve customers' experience with the
program. By the end of 2016, FEMA closed 92 percent of the claims from
the mid-summer severe storms in Louisiana. In the first 30 days of the
incident, FEMA authorized and issued almost $300 million in advance
payments to the NFIP policyholders in Louisiana who sustained damages
by the flood, providing expedited relief to disaster survivors.
FEMA continues to work on other initiatives to support
policyholders, including:
Simplifying the claims process through improved proof of
loss and other forms;
Modernizing the underwriting process; and
Redesigning the risk rating system to help customers better
understand their flood risk.
Successes From Recent Legislative Reforms
Recognizing the need for NFIP reforms in 2012, Congress acted by
passing the Biggert-Waters Flood Insurance Reform Act of 2012 (BW12).
This statute served as a key first step to strengthen the NFIP's fiscal
soundness by addressing discounted premiums and giving FEMA new tools
to manage risk exposure. In March 2014, Congress passed the Homeowner
Flood Insurance Affordability Act of 2014 (HFIAA), repealing certain
provisions of BW12 and modifying components of the NFIP including flood
insurance, flood hazard mapping, grants, and floodplain management.
FEMA has completed implementation of several of key provisions of
these laws, including:
Establishing the Technical Mapping Advisory Council: BW12
directed the creation of the Technical Mapping Advisory Council
(TMAC). The Council reviews FEMA's mapping program and develops
recommendations for improving it. During its assessment, the
TMAC found that the mapping program, when applied as designed,
results in technically credible flood hazard data in areas
where FIRMs are developed or updated, and also provided
recommendations to enhance the program in the future. FEMA has
established a consistent, integrated, and transparent process
to assess and respond to all TMAC recommendations. FEMA has
fully implemented 4 of the Council's 22 recommendations
outlined in the 2015 report through current operations or
ongoing initiatives, and has initiated implementation on an
additional 17 recommendations. This year, we began
implementation of a TMAC recommendation to develop a national
5-year operations plan to help us bridge operations from our
current status to where we are headed in the future.
Designating an Office of the Flood Insurance Advocate
(OFIA): HFIAA directed FEMA to establish the OFIA in 2015, and
the office has experienced significant growth and increased
capability since its inception. The OFIA provides assistance to
policyholders who are unable to get the support they need after
using other existing resources. The OFIA helps coordinate
referrals, verify insurance rate information, educate on flood
risks and rates, and communicate program changes. Through a new
customer relationship management tool, OFIA is able to capture
data and provide insights into issues faced by policyholders in
order to inform program improvements.
Unifying the FMA Grants Programs: Prior to the passage of
BW12, there were three flood grant programs: FMA, Repetitive
Flood Claims, and Severe Repetitive Loss. BW12 eliminated the
Repetitive Flood Claims and Severe Repetitive Loss programs and
added funding for the mitigation of repetitive loss and severe
repetitive loss properties under the FMA program. Since
unification of the programs, demand for FMA grants has exceeded
available funds so FEMA awards grants to those projects that
provide the most risk reduction benefit.
Establishing a Reserve Fund: BW12 directed FEMA to set up a
reserve fund for meeting the expected future obligations of the
NFIP, including payment of claims, claim adjustment expenses,
and the repayment of amounts outstanding under any note or
other obligation issued by the Administrator. In 2016, the
Reserve Fund paid out $1.3 billion in claims to insured
survivors. The NFIP has also paid for reinsurance through the
Reserve Fund, consistent with its designated purpose for
meeting expected future obligations.
Managing Risk through Reinsurance: BW12 gave FEMA the
authority to obtain reinsurance from the private reinsurance
and capital markets. Reinsurance is an important financial risk
management tool used by private insurance companies and public
entities to protect themselves from large financial losses by
diversifying risk across multiple markets. FEMA executed a 1-
year agreement, effective January 1, 2017, with a consortium of
25 reinsurers. Under the agreement, reinsurers agreed to
indemnify FEMA for flood claims paid during 2017 on an
occurrence basis. The layer is structured to cover 26 percent
of losses between $4 billion and $8 billion. This agreement
transferred a combined total of $1.042 billion of the NFIP's
flood risk to the private reinsurance market. This reinsurance
placement stands as a first of its kind for a Federal program.
FEMA's Core Principles for Reauthorization
Through internal analysis and lessons learned, FEMA offers the
following principles that would improve NFIP effectiveness as Congress
considers reauthorization.
First, the NFIP reauthorization should be enacted before the
September 30, 2017 expiration of the program, and should extend the
program for multiple years. The stability of the real estate and
mortgage markets depend on an on-time, multiyear reauthorization. All
federally backed mortgage lenders are required to verify that
properties in special flood hazard areas (SFHA) have flood insurance
policies prior to approving a mortgage. During periods in the past when
the NFIP's authorization lapsed, or was only extended for a short
period, uncertainty about flood insurance availability impacted
property owners' ability to buy and sell homes in high risk flooding
areas.
Second, the reauthorization should recognize the need to increase
flood insurance coverage across the Nation. At a national scale,
estimates lead us to believe as little as one third of residential
properties in the SFHA have NFIP policies. Yet flooding can happen
anywhere. Floods are not wholly contained within SFHAs. Over the past
10 years, approximately 20 percent of all NFIP claims come from low to
moderate-risk policyholders.
Flood insurance facilitates the ability of a property owner or
renter to recover after a flood, whether the insurance is provided by
the NFIP or private insurers. FEMA recognizes that there is a growing
interest by private insurers to offer flood insurance protection. FEMA
supports this because an insured survivor--regardless of where they
purchase their coverage--will recover more quickly and more fully. Two
related areas require attention. First, it will take time for the
private market to adapt to a market currently primarily served by a
public program. Second, if the private market were to glean only the
lower-risk policies, the NFIP would be left with all of the highest-
risk policies. This could lower NFIP premium revenue while increasing
potential claims payouts. Such actions would leave the program and
taxpayers with even more financial risk.
As we look forward to the next several years, a number of
opportunities should be explored that could provide for the growth of
the private market for flood insurance. Improving the Nation's overall
flood resiliency will depend on finding an appropriate balance between
reducing risk to the taxpayer through a greater private sector role
while sustaining a robust and affordable Federal program. Among the
ideas to explore would be identifying a future point in time by which
flood policies for all new construction would be provided by the
private market. When coupled with ongoing floodplain management and
building code enforcement, these new residential structures would be
built to insurable levels of risk for the private market.
In some States, the private flood market already provides excess
and surplus coverage as well as ``flood riders'' on some homeowner's
policies. While the private markets are expanding, FEMA is exploring
improving the suite of options available for NFIP policies, such as
including increased policy limits deck and basement coverage, and
various deductible levels. The NFIP would collect additional premiums
commensurate with any extra coverage policyholders select. Moreover, by
providing coverage options that customers need, the additions could
attract new NFIP customers improving the program's financial stability
expanding the number of Americans with flood insurance. FEMA also
recognizes the unique challenges that farmers may experience when
navigating the NFIP's current requirements with regards to agricultural
structures. These agricultural needs can be addressed through this re-
authorization.
Additionally, the statutory definitions of ``repetitive loss'' must
be brought into alignment so that there is consistency across program
elements. Properties that experience multiple losses have an
increasingly adverse impact on the financial stability of the program.
Congress has previously acknowledged this circumstance, and should
explore caps on cumulative losses that well exceed policy limits and
the value of the structure. As the program moves forward, NFIP premiums
should reflect a property's true risk. We need to move from today's
program, which delivers only a final premium which may be lower than a
current estimate of the full risk rate, to a program which clearly
communicates the full risk rate and any discounts (such as pre-firm
subsidy, newly mapped subsidy, or grandfathered rates). Given concerns
related to affordability, it may take some time, but the program needs
to be on a course to eventually arrive at full risk rates for all
policyholders. This includes addressing grandfathered and subsidized
rates.
Ultimately, the premium paid for flood insurance must reflect the
risk--whether this is done by increasing premiums, reducing risk
through mitigation grants, or a combination thereof--the fiscal
solvency of the program depends on it. This is central to a sound
financial framework for the NFIP. The NFIP currently carries a debt of
$24.6 billion dollars which is serviced through increasingly large
interest payments. It is important to note that nearly all of the flood
programs mandated by law--programs to reduce risk, the administrative
costs of WYO companies, and the payment of interest on the debt--are
funded solely through the payment of premiums.
Conclusion
To reiterate, flooding continues to be the most common and costly
natural disaster in the United States, with the greatest damage
potential of all natural disasters worldwide. Over the past 50 years,
the NFIP has helped communities, households, and businesses reduce
flood risk, supported flood risk analysis and mapping projects,
expanded sound floodplain management practices across the country, and
reduced the financial burden to survivors when floods occur. We
recognize that the Nation faces broad public policy questions around
flood insurance affordability, continued development in flood-prone
areas, the soundness of the NFIP's financial framework, and greater
private sector participation in flood insurance markets.
Through all of this, FEMA's priority is to increase flood insurance
coverage so that disaster survivors can recover more quickly and fully
after flood events. Through a timely, multiyear reauthorization,
Congress would enable FEMA to continue supporting those who take steps
to protect their homes and businesses.
Thank you again for affording me the opportunity to speak with you
today about this program. I am happy to respond to any questions you
may have.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM ROY E. WRIGHT
Q.1. Mr. Wright, we have discussed on several occasions the
accuracy of the information that determines risk in the
National Flood Insurance Program (NFIP).
What is the status of FEMA's attempt to have a Flood
Insurance Program with accurate actuarial data, and what
further steps is FEMA taking to achieve this goal?
A.1. As part of FEMA's efforts to improving the quality of data
used in the delivery of the NFIP, FEMA is looking to redesign
its approach to risk rating. To ensure FEMA follows leading
practices used in the industry for rating natural catastrophe
risk, including considerations of the actuarial data used, FEMA
is conducting market research through a Request for Information
(RFI) that was issued on January 24, 2017. The RFI can be found
here: https://www.fbo.gov/
index?s=opportunity&mode=form&id=557d24817170f
7475b0f 445f44f9c73d&tab= core&_cview=1
In addition to the RFI, FEMA conducted market research
calls to identify data tools and models that should be used for
risk rating, including tools to determine replacement cost
values. The market research was conducted to determine industry
capabilities in the following areas:
1. Assessment of the current state of catastrophic risk
rating and classification programs;
2. Design of alternate risk rating models;
3. Testing of the alternate risk rating models; and
4. Implementation of alternate models.
FEMA is working to develop a new rating methodology. Once
developed, FEMA will begin a multiyear implementation of the
new methodology, which will be carried out in tandem with a
redesign of our IT systems and will be aligned with
improvements to our insurance product.
Q.2. Mr. Wright, FEMA is not the only Federal agency that is
actively tracking real-time data to assess flood risks in
different communities across the nation. However, it appears
that this information is often not communicated across all
agencies, even though many are working towards the same goal.
Would it be helpful for all agencies that track floodplain
data to work together to share and communicate this data?
A.2. FEMA is working and collaborating with the other Federal
agencies that are involved in the collection, evaluation, and
use of flood risk data to promote sharing of floodplain data.
Together, we are working to improve the ways that we develop,
share, and communicate this information, so that communities
will be better able to understand their flood risks.
Interoperable datasets that are collected and consolidated
using consistent and clear standards across the Federal family
will yield higher quality floodplain data more efficiently, for
both real-time assessments and hazard identification. This
would also lead to simpler, consistent outputs from the Federal
agencies informing more effective decisions at the state and
local level. The availability of this data could also better
incentivize innovation.
One area where FEMA is modeling this behavior is
topographic data acquisition. FEMA recognizes that quality
topographic data is not only essential for credible flood
hazard mapping but for a multitude of other functions of the
Federal Government, states, local communities, and others.
Thus, FEMA's formal policy is to ensure that all topographic
information acquired to support flood hazard mapping is
compliant with U.S. Geological Survey (USGS) 3D Elevation
Program (3DEP) standards to ensure that the information can be
leveraged across Federal agencies.
There are a multitude of datasets that routinely inform
real time response, short term planning, and long term
strategic decisions and come from a number of agencies across
the Federal family. For FEMA to achieve its mission, ``To
support our citizens and first responders to ensure that as a
Nation we work together to build, sustain and improve our
capability to prepare for, protect against, respond to, recover
from and mitigate all hazards'', numerous resources are
required. These resources include, for example, gauge data from
the National Oceanic and Atmospheric Administration (NOAA) and
USGS, critical infrastructure information from the U.S. Army
Corps of Engineers (USACE) and others, land use change
datasets, demographic and population information, power grid
information from the Department of Energy, and many other
sources which must come together routinely. One venue, in
particular, where these datasets can and should come together
to improve operational efficiency across the Federal family
during times of flood related disaster is the National Water
Center within NOAA. Similarly, in the coastal communities, many
of these datasets come together on NOAA's Digital Coast
website. FEMA is committed to continued collaboration with its
Federal Partners and welcomes efforts to ensure that agencies
are incentivized and encouraged to work together and share and
communicate this data more routinely and consistently.
Q.3. Mr. Wright, since the enactment of Biggert-Waters, FEMA
has attempted to strike an appropriate balance between
protecting individuals and the stability of the NFIP.
Can you commit to fully evaluating further policy proposals
to improve the NFIP?
A.3. We commit to fully evaluating further policy proposals to
improve the NFIP.
The Affordability Framework is due to Congress in September
2017. FEMA is working diligently to meet the deadline.
Q.4. Mr. Wright, the Technical Mapping Advisory Council (TMAC)
created a list of 22 recommendations to improve FEMA's flood
mapping data.
What is the status of implementing TMAC's recommendations?
A.4. The 22 recommendations generally fall into 3 key
categories: (1) credible flood data, (2) improved access and
ease of use of FEMA mapping products, and (3) more customer-
oriented products. FEMA has communicated a fundamental
agreement with all 22 of the recommendations and is currently
working toward implementation of each. While FEMA has used
existing mechanisms to implement several of the recommendations
related to credible flood data, we are actively building a
better infrastructure to ensure increased simplicity and ease
of use of NFIP products and services. Currently, FEMA is
working to implement a 5-year mapping, planning, and
prioritization framework and improved measures for FEMA hazard
mapping, and finishing several ongoing improvements to our
Cooperating Technical Partners (CTP) program, consistent with
the TMAC's recommendations. In addition, FEMA is exploring how
to implement some of the customer-oriented product
recommendations that are transformative in nature. FEMA has
taken on two Customer Experience endeavors; one for NFIP
policyholders and one for communities. FEMA is leveraging the
findings from the Customer Experience for Policyholders effort
to kick off an effort to redesign flood risk-rating to better
meet identified needs of NFIP policyholders. The outputs of
these ongoing initiatives are currently being used to refine
and add clarity to the long-term trajectory of the mapping
program and the larger NFIP. Each of these 22 recommendations
are addressed in greater detail in a response to Congress that
will be delivered this summer.
Q.5. When considering a reauthorization of the NFIP, what steps
would you recommend that Congress take to improve the accuracy
of flood mapping information?
A.5. The most critical and foundational element of credible
flood mapping is high-resolution topography. For this reason,
FEMA has and will continue to make targeted investments,
consistent with USGS 3DEP standards, in high-resolution
topography prior to all flood mapping efforts that FEMA
undertakes. These data offer value beyond just the NFIP and
should always be considered when evaluating the needs of any
flood hazard mapping program.
While we continue to make these strategic investments and
to deliver credible flood hazard information, these efforts
must be met with the complementary advances we are making in
our actuarial underwriting practices so that insurance premiums
better reflect the risk that our mapping analyses yield.
Nothing is more powerful to communicate the risk than a pricing
signal.
Q.6. Mr. Wright, an important feature of the NFIP is FEMA's
role in communicating the real risks of certain floodplains.
In addition to the work FEMA is doing to implement more
actuarially sound rates, what steps is FEMA taking to use the
latest technology to inform individuals of the actual risk
associated with living in certain floodplains?
A.6. As you mentioned, the Federal Insurance and Mitigation
Administration (FIMA) is beginning to update the National Flood
Insurance Program's (NFIP) risk rating model. The NFIP's
current approach to risk rating was modeled on insurance
industry practices at the time the NFIP was established. Since
that time, the insurance industry has developed more efficient
and accurate approaches to risk rating. FIMA has an opportunity
to modernize its risk rating approach to deliver accurate,
cost-effective ratings of flood risk to property owners. While
this transformation may take up to five years to design and
fully implement, it will have lasting impacts across FIMA
operations and result in long-term program stability, increased
simplicity and ease of use of NFIP products and services, and
an improved value proposition for customers. A new risk rating
approach could influence not only the rating of insurance, but
also flood hazard mapping and the implementation of floodplain
management requirements.
In addition to risk rating, FEMA continues to work in a
variety of other ways to provide accurate risk information and
increase risk awareness. The FEMA Risk Mapping, Assessment, and
Planning (Risk MAP) program was designed to align efforts
within FEMA to help individuals and communities understand and
take actions to manage their flood risk. Risk MAP defined new
digital, geospatial mapping products to communicate flood
hazards and flood risk more effectively than the traditional
flood maps that have been used for years to administer the
legal requirements of the NFIP. These products include maps of
flood depths that allow individuals to envision the direct
impact on their property of floods of various magnitudes and
detailed risk assessments that quantify the potential losses
for communities and neighborhoods over time. FEMA continues to
work with our stakeholders on how to improve these products to
communicate flood risks more effectively.
The Technical Mapping Advisory Council (TMAC) established
by the Biggert-Waters Flood Insurance Reform Act of 2012 has
also made several transformative recommendations of ways that
FEMA can further leverage technology to fundamentally shift how
FEMA communicates risk. These recommendations include shifting
the delivery of FEMA's flood mapping information to a fully
database-driven digital display environment and moving to
structure-specific risk assessments. FEMA currently maintains
the regulatory flood hazard information for the nation in the
National Flood Hazard Layer (NFHL) geospatial database. This
data is updated daily as revisions and amendments are processed
and FEMA provides a database-driven viewer for this data
online. Over the next few years, FEMA will design and construct
a new system that builds on existing capabilities, leverages
the innovative projects its partners are currently undertaking,
integrates the new Risk MAP products, and provides the
foundation for the future of the mapping program. FEMA will
also evaluate technologies, data sources, and trends for flood
risk quantification aimed at moving to a structure-specific
risk assessment model in the context of the overall effort to
redesign our risk rating methodology.
Another foundational element of credible flood mapping is
high-resolution topography. For this reason, FEMA has and will
continue to make targeted investments, consistent with USGS
3DEP standards, in high-resolution topography prior to
undertaking all flood mapping efforts.
Finally, FEMA has directed the Write Your Own (WYO)
Insurance Companies to review all NFIP policies to determine
the current risk information for each property. While the
grandfathering rating procedure remains in place, this will
allow FEMA to communicate the current flood risk to NFIP
policyholders. FEMA is also able to explain the current policy
rating to policyholders and discuss how and when an Elevation
Certificate can be useful.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
FROM ROY E. WRIGHT
Q.1. In your testimony you stated that FEMA recognizes that
there is a growing interest by private insurers to offer flood
insurance protection. Does FEMA support current legislative
efforts to clarify that lenders can accept private flood
insurance as meeting mandatory purchase requirements? Would
eliminating the noncompete clause for companies that write
flood insurance through the NFIP's Write Your Own program help
provide more flood insurance coverage options for homeowners
and businesses?
A.1. In helping the Nation prepare for, mitigate against,
respond to, and recover from flood disasters, FEMA's priority
is to extend opportunities for flood insurance coverage.
Survivors of flood disasters can recover more quickly and more
fully if they were insured against flood losses, whether they
purchase that insurance from the NFIP or through private flood
insurance markets. There is great opportunity to increase
levels of flood insurance coverage around the Nation given that
a large percentage of homes in high and moderate risk areas
remain uninsured. Private sector providers of flood insurance
can play an important role in increasing coverage.
To that end, FEMA would be happy to work with Congress on
legislative efforts to clarify that federally regulated lenders
and Federal agencies can accept private flood insurance to meet
the mandatory purchase requirements.
An individual can purchase an NFIP flood insurance policy
either: (1) directly from the Federal Government through a
direct servicing agent (known as NFIP Direct), or (2) from a
private insurance company through the Write Your Own (WYO)
Program. FEMA enters into a standard Financial Assistance/
Subsidy Arrangement (Arrangement) with the WYO companies, which
addresses the terms and conditions for administering NFIP
policies.
Article XIII of the Fiscal Year 2017 Arrangement, entitled
``Restriction on Other Flood Insurance,'' restricts WYO
companies from selling certain competing standalone flood
insurance products. This provision traces back to the inception
of the WYO Program in 1984 and is intended to prevent WYO
companies from deriving undue advantage from participating in
the WYO program. The restriction does not prevent:
1. Independent agents from offering both NFIP flood policies
and private flood policies at the same time;
2. WYO companies from offering coverage in excess of NFIP
flood policies; or
3. WYO companies from offering a non-NFIP endorsement of
flood coverage to a homeowner insurance policy.
FEMA encourages WYO companies to offer private flood
coverage through these avenues commensurate with the flood
risk. Some WYO companies currently offer coverage through these
avenues, though many do not, despite the fact that all WYO
companies are free to do so. Accordingly, it is unclear at this
time how much removing the restrictions in Article XIII of the
Arrangement will help increase the availability of private
flood policies.
Q.2. Earlier this year FEMA announced it had secured more than
$1 billion in reinsurance from 25 reinsurers. This was only the
second time in history reinsurance had been secured for the
NFIP. Does the NFIP plan on purchasing any more reinsurance
from the private market this year?
A.2. In January 2017, FEMA made a cornerstone placement of
reinsurance to establish a multiyear NFIP Reinsurance Program.
FEMA does not intend to buy more reinsurance in 2017. FEMA will
evaluate its opportunity to renew and expand upon the
cornerstone placement in January 2018.
In practice, this looks like:
Upgrading the Reinsurance Program's vision,
strategy, and operations based on 2017 lessons learned
to optimize a future multiyear program.
Expanding the NFIP's flood modeling capabilities.
Engaging industry partners to incorporate best
practices from the private sector.
The multiyear Reinsurance Program vision is:
Financial Strength: To strengthen the NFIP's
financial standing by sharing financial risk with
private industry at a price that is fair to the Federal
Government.
Level of Risk: To manage claims exposure by
lessening the need to incur additional Treasury debt.
Stability: To stabilize NFIP's annual expenditures
in order to operate within a predictable and defensible
annual budget.
Customer Experience: To foster strong trust-based
relationships with policyholders based on delivering
consistently outstanding support during and after major
floods.
Efficiency: To institutionalize effective program
and financial management discipline to ensure informed,
data-based decision making.
Transparency: To enhance the credibility of the
NFIP with Federal, state, and local decision-makers and
the private sector thought leaders through bilateral
learning and sharing of detailed risk information.
Q.3. The NFIP has eliminated the ability for a consumer to
cancel their NFIP policy if it is being replaced by a similar
non-NFIP policy. This basically disincentives homeowners to
purchase a private flood insurance policy to replace a more
expensive NFIP policy. Is the NFIP aware of the impact this
policy is having and how soon will the NFIP reinstate the
needed cancellation code to allow homeowners to receive a pro
rata refund for cancellation due to purchase of a duplicate
policy at any time?
A.3. FEMA's current regulations restrict the agency's ability
to issue refunds for cancelled policies. As explained in 44 CFR
61.5(c), the seasonal nature of flooding may encourage some
policyholders to only maintain policies during time of the year
more prone to flood and then cancel policies during lower risk
months. Accordingly, FEMA's regulations only permit refunds
after an insured sells their interest in the insured property.
44 CFR 62.5 also describes circumstances allowing for refunds
related to changes in applicable flood maps and the ending of
mandatory purchase requirements. These regulations do not
provide for refunds related to policyholders obtaining a
private flood insurance policy.
FEMA understands the impact of the current regulation and
is seeking regulatory changes to allow FEMA to cancel the NFIP
policy with premium refund when the insured has obtained a
replacement flood insurance policy through the private company.
In the interim, FEMA currently notifies policyholders at 45
days prior to the expiration date of the NFIP policy. This
should allow policyholders sufficient time to coordinate the
end of their NFIP policy with the beginning of their private
policy.
Q.4. Currently, the NFIP does not consider actual replacement
costs when establishing a customer premium, but it is my
understanding that FEMA is working to develop methods to obtain
a verifiable replacement cost value when a policy is sold. I
also understand that FEMA must redesign its rating systems in
order to implement actual replacement costs. What is the
current status of FEMA's efforts to obtain the necessary data
and development of new rating systems? Also, what is your
current timeline for completion for each of these initiatives?
A.4. As you mentioned, FIMA is beginning to update the NFIP's
risk rating model. The NFIP's current approach to risk rating
was modeled on insurance industry practices at the time the
NFIP was established. Since that time, the insurance industry
has developed more efficient and accurate approaches to risk
rating. FIMA has an opportunity to modernize its risk rating
approach to deliver accurate, cost-effective ratings of flood
risk to property owners. While this transformation may take up
to five years to design and fully implement, it will have
lasting impacts across FIMA operations and result in long-term
program stability, increased simplicity and ease of use of NFIP
products and services, and an improved value proposition for
customers. A new risk rating approach could influence not only
the rating of insurance, but also flood hazard mapping and the
implementation of floodplain management requirements.
To ensure FEMA follows industry best practices for rating
natural catastrophe risk, including considerations of the
actuarial data used, we are conducting market research through
a Request for Information (RFI) issued on January 24, 2017. The
RFI can be found here: https://www.fbo.gov/
index?s=opportunity&mode= form&id= 557d24817170f7475b0f
445f44f9c73d&tab= core&_cview=1
In addition to the RFI, FEMA conducted market research
calls to identify data tools and models that should be used for
risk rating, including tools to determine replacement cost
values. The market research was conducted to determine industry
capabilities in the following areas:
1. Assessment of the current state of catastrophic risk
rating and classification programs;
2. Design of alternate risk rating models;
3. Testing of the alternate risk rating models; and
4. Implementation of alternate models.
FEMA is working to develop a new rating methodology. Once
developed, FEMA will begin a multiyear implementation of the
new methodology, which will be carried out in tandem with a
redesign of our IT systems and will be aligned with
improvements to our insurance product.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM ROY E. WRIGHT
Q.1. Mr. Wright, you stated that Increase Cost of Compliance
(ICC) is a ``mini-grant'' mitigation program and there is an
obvious assumption that when a structure is brought into
compliance the flood risks are reduced; however, they are not
eliminated. If the ICC program only funds elevations and
demolitions, it seems the NFIP is incentivizing people and
property to remain in some hazardous locations that may not be
compatible with community plans. Wouldn't it be more effective
to provide owners and the community a choice to eliminate the
flood risk by allowing the comparable ICC amount to be used for
demolition and acquisition costs as a means of compliance? This
would eliminate the risk in appropriate situations and allow
for greater coordination on the distribution of ICC funds to
ensure the property owner is fully aware of all mitigation
opportunities that exist, as well as, the risks and building
restrictions that still remain if the property owner elects to
elevate.
A.1. The Increased Cost of Compliance (ICC) provision of the
Standard Flood Insurance Policy (SFIP) provides policyholders
an individual choice to mitigate flood damaged property through
elevation, relocation and demolition. The original intent of
ICC was set forth in the National Flood Insurance Reform Act of
1994, Section 555, which required the NFIP to provide insurance
coverage for the increased cost of complying with local and
State land use laws that require elevation of structures that
have been substantially or repetitively damaged by a flood
event. In general, substantial damage means ``damages from any
origin sustained by a structure whereby the cost of restoring
the structure to its before damage condition would equal or
exceed 50 percent of the property's market value before the
damage.'' Therefore, ICC provides additional funding to
policyholders for the consequential cost to comply with state
or local building laws during reconstruction. Prior to ICC, a
policy holder was only reimbursed for the cost to repair the
actual physical damages to the structure, but did not receive
funding for mitigation opportunities to protect the structure
against future flooding. Instead of encouraging people to
remain in the flood hazard area, ICC provisions added
mitigation options of elevation, demolition and relocation to
reduce future flood risk.
Currently, ICC claims payments are limited to $30,000. In
most cases, this would not cover the entire costs of a property
acquisition. In addition, there is no buyout authority within
the ICC program to enable property acquisition and ownership
transfer to a community that would allow the property to be
maintained as open space.
However, ICC is available to be used for acquisition if the
local community chooses to participate in a Federal grant
program. In a FEMA grant, ICC funding can be used as the non-
Federal cost share to support a homeowner's decision for
acquisition. One such FEMA grant program, Flood Mitigation
Assistance (FMA) provides funding for reducing or eliminating
the long-term risk of flood damage to structures insured under
the NFIP. FMA funding is appropriated by Congress out of the
National Flood Insurance Fund (NFIF). After a flood event, many
homeowners bring their homes in compliance with the local flood
standard, through the use of ICC funds toward elevation,
relocation, demolition or acquisition, thereby removing or
reducing their flood risk.
Q.2. If FEMA cannot pay back its debt, what percentage of an
increase in policy premiums would it take to pay back that
debt?
A.2. Given the current state of the program, on average,
premiums would need to at least double to repay the debt within
ten years. This estimate comes with two important caveats:
1. repayment of the debt cannot be guaranteed if the NFIP
sustains a large event within the ten year period, and
2. such large, unprecedented premium increases to the
entirety of NFIP policyholders would probably greatly
reduce the number of policies in force due to
policyholders leaving the program, and therefore, the
NFIP would still not have the revenue necessary to pay
back the debt.
For a detailed examination of the NFIP's ability to repay
the debt, please refer to our December 17, 2014 report to
Congress, in which we outlined four different ten year
repayment strategies in the Appendix D. Two scenarios looked at
increases in the reserve fund assessment to pay off the debt,
and two scenarios explored debt forgiveness. At that time, we
would have needed to either implement an immediate 76 percent
reserve fund assessment, whereby premiums would almost double,
or phase in a reserve fund assessment that would increase to
113 percent, whereby premiums would comply with the statutory
15 percent premium increase limitation but would more than
double over the ten year period, to repay that debt within ten
years. Since the issuance of that report, the NFIP's
policyholder base has declined and our debt has increased
following the flooding of Calendar Year 2016.
Q.3. What is FEMA doing to modernize its IT systems? In April
of 2016, the GAO did a study recommending that FEMA fully
define its investment board's roles and responsibilities and
procedures for selecting and overseeing investments, update its
strategic plan and complete plans for IT modernization, and
establish time frames for completing workforce planning
efforts. In addition the GAO also recommended that FEMA should
establish policies and guidance for implementing key IT
management controls & DHS concurred with those recommendations.
How is FEMA comporting with the GAO study? Do you agree with
the GAO's assessment of the NFIP particularly relating to IT
issues? What efforts have you taken to work with FEMA
management on IT issues? What recommendations would you make to
help improve the NFIP program and move it off of the high-risk
list?
A.3. FEMA's Component Acquisition Executive (CAE) is leading
the management and response for the April 2016 Government
Accounting Office (GAO) study for overseeing investments. The
CAE has put into place several processes and procedures to
improve our oversight of investments and modernization efforts,
such as conducting FEMA Acquisition Review Boards (ARB) and
establishing CAE Executive steering committees. For Information
Technology (IT) modernization, FEMA is participating as one of
the five Department of Homeland Security's (DHS) Agile Pilot
Programs. These programs are subject to routine oversight by
the DHS Financial Systems Modernization Executive Steering
Committee, as well as the DHS ARB. The ARB recently approved
the NFIP IT Modernization Program, known as PIVOT, to enter the
Obtain Phase and is running several months ahead of schedule
due to the deep engagement and commitment from FEMA and DHS to
make sure this program is successful.
We do agree with the GAO study that IT issues must be
addressed for the NFIP to be more effective and efficient, and
to that end, not only have we launched the NFIP IT
Modernization Program (PIVOT) mentioned above, but as FIMA has
reorganized, we invested in developing a Federal oversight
staff and establishing an Insurance Systems Branch.
Q.4. Mr. Wright, in your testimony, you stated that ``the
program needs to be on a course to eventually arrive at full
risk for all policyholders [and] [t]his includes addressing
grandfathered and subsidized rates.''
This could take some time to achieve, how long do you think
it would take to resolve this matter and arrive at a property's
true risk? In the marketplace, especially at a local community
level, there is significant fear of the unknown-what is your
ideal timeline?
A.4. Some policyholders' rates are far below the rate that
reflects their current flood risk. Under current law, the rates
on certain pre-FIRM subsidized policies--including those for
nonprimary homes, severe repetitive loss properties,
businesses, and substantially damaged structures--are required
to increase by 25 percent annually. The rates on all other pre-
FIRM subsidized policyholders must increase at least 5 percent
per year but no more than 15 percent as a class and 18 percent
per policy on an annual basis.
But not all policyholders are on track to move to rates
that reflect their current risk. For example, while subsidies
for pre-FIRM structures and unfunded discounts for newly mapped
policies are being removed, other discounts, including
grandfathered discounts, have not yet been phased out. Also,
towards the lower end of the range allowable for the mandatory
annual rate increases (e.g., an increase of 5 percent per
year), it could take much longer than 10 years to move to full-
risk rates.
In short, consideration should be given to phase out
discounts for all policyholders not paying rates that reflect
their current risk. And, as I stated in my testimony, this is
especially true for those that have incurred multiple losses.
Furthermore, addressing affordability for low-income
policyholders can ameliorate rate increases for those
individuals for whom NFIP rates present a true financial
burden.
But, as you point out, giving policyholders and markets
predictability about the timeline for phasing out subsidies and
discounts is important. We are exploring options for phasing
out remaining subsidies and discounts over a realizable
timeframe, such as a ten year horizon.
Q.5. What legislative changes are needed to ensure that FEMA
has adequate safeguards and controls in place to prevent
improper payments from its flood insurance and disaster
recovery programs?
A.5. There is a robust statutorily-required process in place to
address improper payments in flood insurance and disaster
recovery programs. The Improper Payments Information Act of
2002 (IPIA) requires Federal agencies that are susceptible to
issuing significant improper payments to take specific steps to
identify and prevent improper payments. Congress later added
the Recovery Audit Act that replaced and consolidated the
requirements of both IPIA and the Recovery Audit Act. The
Improper Payments Elimination and Recovery Act of 2010 (IPERA)
amended the Act and required an increase in diligence of
auditing Federal agencies to prevent improper payments. A
subsequent statute, the Improper Payments Elimination Recovery
Information Act of 2012 (IPERIA), was also enacted. It requires
Federal agencies to improve the quality of oversight for high
dollar and high-risk programs. It mandates that agencies share
data on improper payments they recovered and identify ways to
increase recovered amounts. To comply with these laws, the FEMA
Office of the Chief Financial Officer leads the IPIA/IPERA/
IPERIA efforts to assess the National Flood Insurance Program
and to identify and recover overpayments.
Furthermore, FEMA Hazard Mitigation Assistance (HMA)
programs have regulatory (2 Code of Federal Regulations) and
programmatic procedures, including internal controls, to
prevent improper payments to the extent possible.
FEMA will continue to identify and eliminate improper
payments, in accordance with statutory requirements and
regulations.
Q.6. Does FEMA maintain a central data warehouse or database
where it might be able to undertake data analysis to better
understand its program performance and effectiveness? Would
better, more complete data help FEMA in the administration of
these programs?
A.6. FEMA does centrally manage the transactional history of
the NFIP policies and claims, though we are working to update
our system for these data. The NFIP's IT Modernization effort
(known as PIVOT) will improve access to the historical record
of the NFIP for data analysis, performance management, and
program policy development. The new system will not only
provide near-real time access to NFIP claims and policy data,
it will also enable industry standard practices--such as
Customer Relationship Management and case tracking--to help
give FEMA better insight into the customer experience and
program performance. In addition, we will have much timelier
insight on the program's financial position.
As we have awarded our new NFIP Direct contract, we have
created a ``laboratory'' to test potential program and product
changes to determine how they affect the customer experience
and program performance. We have also established an Industry
Management Branch and a Program Management Branch to improve
our coordination and oversight efforts to ensure that
contractors meet program and contractual performance standards.
Lastly, we have established an Analytics and Policy Branch,
charged with the dual mission to ``serve as the data hub and
analytic center for Federal insurance'' and ``promote the
continuous improvement of NFIP practices and policies.'' The
analytics and policy functions are within the same branch to
enable policy decisions to consider data insights.
To support the above efforts, FEMA staff are committed to
developing requirements for and building an Enterprise Data
Warehouse, which will enable us to leverage ``big data'' from
numerous sources to perform data analytics and gain insight on
the impacts of flooding, potential program changes, and ensure
that we are supporting the response and recovery efforts post-
disaster. Better and more complete data pertaining to
policyholder characteristics, flood risk, and the built
environment will enhance FIMA's ability to undertake data
analysis to better understand its program performance and
effectiveness.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY
FROM ROY E. WRIGHT
Q.1. Under the Homeowner Flood Insurance Affordability Act of
2014, Congress required FEMA to develop a Draft Affordability
Framework ``that proposes to address, via programmatic and
regulatory changes, the issues of affordability of flood
insurance sold under the National Flood Insurance Program,
including issues identified in the affordability study . . . ''
When will FEMA complete this study?
A.1. The Affordability Framework is due to Congress in
September 2017. FEMA is working diligently to meet the
deadline.
Q.2. The Homeowner Flood Insurance Affordability Act of 2014
requires gradual rate increases to properties now receiving
artificially low (or subsidized) rates instead of immediate
increases to full-risk rates required in certain cases under
BW-12. FEMA is required to increase premiums for most
subsidized properties by no less than 5 percent annually until
the class premium reaches its full-risk rate. With limited
exceptions, flood insurance premiums cannot increase more than
18 percent annually.
What percentage do you anticipate premium rates increasing
for these subsidized properties by over the coming years and
what considerations will be taken into account to reach this
decision?
How many policyholders are paying subsidized rates? What
percentage of the total policyholders do these subsidized
ratepayers represent.
A.2. Under the current statute, certain pre-FIRM subsidized
policies-including those for nonprimary homes, Severe
Repetitive Loss properties, businesses, and substantially
damaged structures-are required by statute to increase 25
percent annually until they reach full actuarial rates (42
U.S.C. 4015 (e)(4));(42 U.S.C. 4014(a)(2)(A)-(E). All other
pre-FIRM subsidized policyholders, including primary single
family residences, must increase at least 5 percent but no more
than 15 percent as a class and 18 percent per policy (42 U.S.C.
4015 (e)(1) through (3)). The increase for any given year is a
balance of many factors, primarily a balance between
affordability to the property owner and program solvency of the
insurance fund. Premium increases at the higher end of the
range would tend to increase the overall amounts collected from
policyholders, unless the increases induce policyholders to
drop their coverage. Premium increases at the lower end of the
range will barely exceed inflation and could take years, even
decades, to reach full risk for some, but will retain more
policyholders. Each year, the Federal Insurance and Mitigation
Administration sets the increase factor for the following
year's rate changes. This year, FEMA increased premiums for
pre-FIRM primary single family residences at the lower end of
allowable range with average increases of 5.5 percent beginning
on April 1, 2017. On October 1, 2017, we will announce rate
increases that will become effective on April 1, 2018.
As of the beginning of Fiscal Year 2017, roughly 800,000 or
16 percent of policyholders pay pre-FIRM subsidized rates,
roughly 200,000 or 4 percent of policyholders pay Newly Mapped
subsidized rates, and roughly 20,000 or less than 1 percent of
policyholders pay rates in the other subsidized categories.
Q.3. Flood insurance policyholders are often unaware of the
exclusions and limitations in their policies until they have a
claim. In contrast, these same people have a much better
understanding of their homeowners insurance policy and the
various optional coverages and benefits the homeowners policy
provides. The consumer's lack of understanding about their
flood policy results in complaints, coverage disputes and
sometimes lawsuits when they become aware at the time of claim
that there is no coverage under the NFIP flood policy for loss
to their basement, for building code upgrades during repair, or
for additional living expenses to pay for alternative lodging
when their home becomes uninhabitable due to flooding. They
cannot understand why these coverages are available under their
homeowners policy but not the NFIP policy. Many complaints
about flood insurance arise from coverage disputes and the fact
that the NFIP policy's coverage is not as robust as consumers
expect.
What steps are you taking to minimize coverage disputes and
improve customer satisfaction?
A.3. FEMA is committed to making our products and procedures
easier-to-understand for the policyholder. Under the Bunning-
Bereuter-Blumenauer Flood Insurance Reform Act of 2004 (FIRA),
Public Law 108-264, 118 Stat. 725, 42 U.S.C. 4001, Congress
requires the NFIP to ensure that policyholders receive
important information about their flood insurance coverage. In
October 2005, in an attempt to help policyholders understand
their coverage prior to a flood, FEMA began providing
policyholders with: (a) the property's flood loss history
information, as required by FIRA, Section 202 (a)(4); (b) the
claims handbook, as required by FIRA, Section 204; (c) the
acknowledgement, as required by FIRA Section 203; (d) a summary
of coverage; (e) a copy of the flood insurance policy; and (f)
a cover letter referencing these enclosures.
FEMA is also currently re-writing the NFIP Claims and
Underwriting Manuals in plain language to provide consistent
guidance for adjusters and insurance examiners as they interact
with NFIP policyholders. Additionally during recent flooding
events, FEMA prepared and distributed an ``NFIP Claims Process
Fact Sheet'' that guides policyholders through the claims
process and clearly explains the steps to take if they do not
agree with the adjuster's estimate.
FEMA also improved our appeals process to better serve our
customers--providing greater transparency, access, and
accountability. FEMA has dedicated insurance examiners
specializing in appeals. FEMA tracks each step of the appeals
process to increase accountability, assure quality, and make
the process more timely and efficient.
During the appeal review, FEMA ensures the adjustor and
Write Your Own (WYO) company or NFIP Direct Servicing Agent
applied FEMA's rules correctly. FEMA begins with the materials
submitted by the customer, either by mail or using a new email
option ([email protected]), in support of the
appeal. FEMA identifies the information needed to resolve the
appeal at the outset, and works with the WYO companies to
ensure that information is received as quickly as possible.
FEMA encourages carriers to resolve issues in favor of
policyholders based on FEMA's input whenever possible.
Regardless of whether FEMA upholds or overturns the original
denial, FEMA explains every detail of the decision to the
policyholder in writing at the completion of the review. The
decision sets forth the key facts, the relevant rules, and how
those rules apply to the situation presented on appeal.
Q.4. Can you assure us that every person who lives in a special
flood hazard zone and has a federally backed mortgage has flood
insurance?
If not, can you estimate it?
What prevents you from knowing this figure?
A.4. Section 102 of the Flood Disaster Protection Act of 1973
(42 U.S.C. 4012a) requires Federal lending regulators and
Federal agencies that provide direct housing assistance,
including mortgage loans, to require properties located in a
Special Flood Hazard Area (SFHA) to obtain flood insurance. As
such, FEMA has a very limited role in the monitoring and
implementation of the mandatory purchase requirement. As
explained below, FEMA does not have current, definitive
information on the compliance rate for mandatory purchase
properties, because FEMA does not regulate or carry out the
mandatory purchase requirement.
From FEMA's perspective, flood insurance take-up is much
broader than the mandatory purchase requirement. While the
mandatory purchase requirement is one way to increase
participation in the National Flood Insurance Program, it only
targets those homeowners in the SFHA with federally backed
mortgages. FEMA considers its market for flood insurance to
include all potential flood insurance purchasers, regardless of
their mortgage status. Flood insurance take-up or market
penetration is not synonymous with those people subject to the
mandatory purchase requirement.
FEMA commissioned an analysis in 2014 that explored
penetration rates and mandatory purchase compliance, but we do
not currently have a basis to validate the compliance rate in
that analysis. In the three years since FEMA commissioned the
analysis, FEMA has learned more about its own data and the
potential limitations of the analysis.
Other entities have examined mandatory purchase compliance.
For example, the National Academies of Sciences (NAS) Report:
Levees and the National Flood Insurance Program notes that
estimates of the mandatory purchase requirement compliance have
been between 50 and 78 percent. However, the NAS study also
notes that ``studies indicate that estimates of both market
penetration in the SFHA and compliance with the mandatory
purchase requirement have varied considerably and are very
sensitive to the assumptions made in the study process.''
FEMA does not know which properties are subject to the
mandatory purchase requirement. We obtain no data on insurance
requirements beyond those who may receive a FEMA grant under
the Stafford Act following a disaster. FEMA does not track
compliance with the mandatory purchase requirements primarily
because we have no available data on which residential
structures have a federally backed mortgage.
While FEMA does not have access to mandatory purchase
compliance rates, we do have estimated market penetration rates
for NFIP flood insurance. Market penetration is a measure of
flood insurance take-up and we calculate this penetration rate
based on the number of NFIP insured residential structures
compared to the number of residential structures overall. This
includes NFIP insurance only, and does not include private
flood insurance policies. FEMA does not define market
penetration in terms of mandatory purchase compliance, because
the NFIP total market includes all potential flood insurance
purchasers, regardless of their mortgage status.
FEMA estimates that market penetration in SFHAs varies
state to state, ranging from 6 percent to 65 percent with a
national average of 30 percent. In other words, FEMA estimates
that nationwide, approximately 30 percent of the residential
structures in the SFHA carry NFIP insurance. FEMA believes that
the statewide totals provide an accurate market penetration
estimate for the majority of states. Regardless of how well
mandatory purchase is enforced, this low rate indicates that
the majority of homes at high risk of flood do not have NFIP
flood insurance policies. In case of a major flood, uninsured
residents will not be able to recover as quickly or as fully as
insured individuals will.
FEMA will continue to refine its methodology and utilize
additional data to provide more accurate state and county-level
estimates of NFIP market penetration in the future.
Q.5. Prior to Biggert Waters 12, were all of the post firm
policyholders paying actuarial rates for FEMA flood insurance
policies?
Given the fact that BW12 forced the inclusion of
catastrophic lost years in the actuarial rate calculations,
would you say that post BW12 the post firm policyholders are
paying greater that the actuarial rates?
A.5. In response to the first question in this QFR, post-FIRM
policyholders in the following classes paid less than actuarial
rates prior to enactment of the Biggert-Waters Flood Insurance
Reform Act of 2012:
Pre-1981 V-Zone Policies: Pre-FIRM and Post-FIRM
properties in a V zone, built before FEMA introduced
wave height into its coastal maps.
Zones AR and A99: Pre-FIRM and Post-FIRM
Policyholders in areas with levees under construction
or reconstruction were rated as if the levee was
complete.
Group Flood Insurance Policy: Low-cost policy
issued to homeowners who did not have NFIP coverage
prior to receiving Federal disaster assistance for
flood damage. These were issued to both pre-FIRM and
post-FIRM structures.
Emergency Program: Policyholders in a community in
the initial phase of participating in the NFIP when
flood hazard information was not yet available. (This
category is not technically post-FIRM, since the
community had not yet adopted a FIRM, but is included
in this answer to complete the list of subsidized rates
other than pre-FIRM rates that were in effect prior to
the Biggert-Waters Flood Insurance Reform Act of 2012).
In response to the second part of the question, FEMA has
always considered the full range of all possible loss years,
including catastrophic years, in its calculation of actuarially
rated policies. Both the likelihood that catastrophic years
occur and the possibility of higher damages resulting from
catastrophic events are included in FEMA's rate setting
practices. Therefore, the statutory requirement to reflect
catastrophic loss years did not alter FEMA's rate setting
practices.
Q.6. How much money does FEMA pay annually in interest to the
Federal treasury for its debt?
A.6. The NFIP carries $24.6 billion in debt to the Department
of Treasury. The program pays nearly $400 million per year in
interest to the Treasury on these borrowed funds. Since
Hurricane Katrina, the NFIP has paid over $3.4 billion in
interest to the Department of Treasury. In FY17, FEMA
anticipates that it will pay an additional $390.2 million in
interest.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR DONNELLY FROM ROY E. WRIGHT
Q.1. Mr. Wright, in recent years, communities across my state
have shared with me their frustrations with FEMA, NFIP, and the
flood mapping process. The mapping program, particularly when
it needs amending, can be costly and time-consuming for
communities, who often have difficulty getting suitable answers
or assistance when complicated situations arise.
Do you believe recent internal changes, such as the
Technical Mapping Advisory Council (TMAC), have improved FEMA's
coordination and communication with impacted communities?
A.1. Yes, FEMA's coordination and communication with
communities expanded significantly and continues to improve as
a result of a number of internally-driven initiatives. Several
TMAC recommendations have enhanced those efforts. In
particular, two recommendations in the 2015 TMAC Annual Report,
Recommendations No. 1 and No. 15, focus on ensuring that FEMA's
products meet the needs of their users and that FEMA's
communication conveys the importance of addressing flood risk
for more resilient communities today and in the future. Many of
these recommendations are intended to ensure that FEMA provides
better data and information so that communities can make better
risk-informed decisions. FEMA is actively implementing both of
these recommendations through our Customer Experience for
Communities initiative, a multiyear effort that was initiated
in 2016.
FEMA can help a community become more resilient provided
the community is prepared to be an active and full partner in
planning and implementation. As users of flood risk data and
products, communities are also customers. Thus, excellent
communication and strong relationships are crucial in our
engagement with communities. FEMA aspires to provide clear,
direct, and timely communication as well as products and
processes that are easy to navigate, and to foster trusting
relationships with our state, local, tribal, and territorial
partners.
We have made significant progress toward this goal. In
2015, FEMA created the Community Engagement and Risk
Communication (CERC) initiative to help FEMA do a better job of
talking and working with communities nationwide to help them
understand and manage their flood risk in a way that is
participatory and productive. As mentioned above, FEMA is
implementing the Customer Experience for Communities initiative
to determine how we might better improve our engagement with
communities. Our exploratory efforts, which included a number
of community interviews and site visits, resulted in the
proposal of several new initiatives aimed at improving how we
work with communities through the National Flood Insurance
Program (NFIP). Over the next year, FEMA will continue to act
upon lessons learned via the Customer Experience for
Communities effort, while re-designing the approach FEMA
follows when working collaboratively with communities to update
flood risk. It is important for FEMA to do so in a manner that
is flexible enough to account for communities with varying
capabilities of assessing and managing their risks.
Q.2. What are the most common concerns and complaints heard
from communities about the mapping process? What more can be
done to assist small and rural communities concerned by the
costs and time-consuming nature of challenging flood hazard
maps?
A.2. As part of our ongoing multiyear Customer Experience for
Communities effort, FEMA has had a number of conversations with
National Flood Insurance Program (NFIP) participating
communities regarding the challenges they face while working
with FEMA to update their flood insurance rate maps. Most
often, communities asked for increased engagement and public
education, shorter map development timelines, and the
flexibility to tailor our processes and procedures to better
align to their individual needs. As a result of this feedback,
FEMA is taking a comprehensive look at how we engage with
communities during a Risk MAP project and designing a
streamlined and segmented approach to support the needs of
communities with varying capacities and capabilities. Under
this new approach, we would provide more flexibility for our
customers that seek to take a more active role in updating
their flood risk assessment data and associated products, while
providing additional support to small and rural communities
that might not have the same levels of expertise or resources.
We are also identifying ways to shorten the process while
engaging more members of a community, introducing and/or
leveraging tools that afford more visibility into our process.
Later this summer we will test these new streamlined approaches
with communities; we plan to roll out successful changes in
FY18.
Q.3. Mr. Wright, I have repeatedly heard complaints from
homeowners, small businesses, and even realtors, about the
cost-prohibitive nature of the appeals process. If you are
drawn into a flood map, the financial burden is on the taxpayer
to prove their case and successfully challenge. If they don't
win the appeal, it will have been very expensive. That is a
financial risk many families and businesses cannot afford to
take.
Are there ways to improve the appeals process to eliminate
the financial disincentives to challenging a potentially
erroneous flood map?
A.3. Throughout an ongoing flood study to update a Flood
Insurance Rate Map (FIRM), better communication with the
affected communities during the study process can avoid the
need for an appeal or, in the event of an appeal, help reduce
the costs of challenging potential errors on a FIRM. In
accordance with 44 C.F.R. ' 67.6, appeals must be accompanied
by data supporting the view that the flood hazard information
proposed by FEMA is scientifically or technically incorrect.
This technical data to support an appeal must be provided by
licensed professionals. Helping communities during and after a
flood study to understand the requirements for submitting an
appeal, including the need for technical data, may help reduce
their costs for providing this information.
The most efficient way for local communities to contribute
to enhancing their updated flood map is to participate in the
mapping process during an ongoing study and to alert FEMA at
that time to any additional relevant information that they want
it to consider, preferably before or while the preliminary maps
are being prepared. Community officials are given several
opportunities prior to the statutory 90-day appeal period to
understand the engineering methodologies and techniques that
will be used to update the FIRM. Participation in Flood Risk
Review meetings can be valuable to all parties, including and
giving communities the opportunity to present information to
FEMA that may guide the depiction of revised floodplains.
Through the early involvement of a community in the mapping
process, resources can be saved by avoiding the need for
potential challenge after the FIRM is prepared.
Flood hazards change over time, as do the available
technologies and methodologies for studying them. FEMA's goal
in this area is to provide communities across the Nation with
high-quality flood maps and other tools that they can use to
identify and mitigate their flood risk and the potential
impacts of flooding. Using more precise flood hazard mapping,
residents and businesses are better equipped to make informed
decisions about their flood risk and take appropriate measures
to protect themselves and their property.
It should be noted that a FIRM can be revised at any time,
and community officials may submit scientific or technical data
to FEMA to support specific map revisions after an updated FIRM
goes into effect. All requests for map revisions should be
submitted through the Chief Executive Officer of the community
as the community must adopt any changes to the FIRM to maintain
its participation in the NFIP. To help communities compile the
data required to support map revision requests, FEMA has
developed step-by-step instructions and forms, which are
available on the FEMA website at http://www.fema.gov/mt-2-
application-forms-and-instructions. Following a review of the
community's map revision request and supporting data, FEMA will
revise the FIRM and the Flood Insurance Study report, if
appropriate. This type of revision is generally issued within
90 days of the date all required data are received, and most
revisions will be effective within 120 days of the date they
are issued. For questions about FEMA's map revision processes,
your constituents can contact the FEMA Map Information exchange
at 1-877-336-2627.
Additional Material Supplied for the Record
LETTER SUBMITTED BY THE NATIONAL MULTIFAMILY HOUSING COUNCIL AND THE
NATIONAL APARTMENT ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY THE PROPERTY CASUALTY INSURERS ASSOCIATION OF
AMERICA
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
TESTIMONY SUBMITTED BY THE CONSUMER MORTGAGE COALITION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
REAUTHORIZATION OF THE NATIONAL FLOOD INSURANCE PROGRAM--PART II
----------
THURSDAY, MAY 4, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:04 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
During our last flood insurance hearing, Mr. Wright
outlined FEMA's four core principles for reauthorization,
including: an on-time, multiyear reauthorization; increasing
flood insurance coverage through both the NFIP and the private
markets; addressing barriers to meeting the needs and demands
of their customers; and enhancing the transparency of the
program's financial framework.
Another takeaway from the hearing was that FEMA is still in
the process of implementing some of the 2012 and 2014 reform's
major provisions.
FEMA also continually receives recommendations for more
improvements from groups that were created by the laws. For
instance, both the re-established Technical Mapping Advisory
Council and the newly established Office of the Flood Insurance
Advocate recently released their annual reports outlining
additional changes for mapping and consumer experience.
I encourage FEMA to continue its important work
implementing previous reforms and making appropriate
improvements. Even so, there is still much work to do.
The NFIP expires at the end of September unless
reauthorized by Congress. Working together and balancing
reforms that protect taxpayers and assist consumers, we can
reauthorize the program on time.
To build upon our previous hearing, organizations
representing a diverse set of the program's stakeholders join
us today to provide their recommendations.
I look forward to engaging our witnesses on a number of
important questions, including: how to offer consumers more
choice by growing the private market and ensuring shared risk
by both the Government and the private sector; how new and
better technologies, such as LIDAR, can be more incorporated in
mapping; how to continue toward risk-based rates while
balancing affordability; and how long the program should be
reauthorized.
Senator Brown and I continue, on a bipartisan basis, to
receive the thoughts and concerns from the program's
stakeholders. We have also been gathering priorities for the
program from Committee Members.
I want to thank each of our witnesses today for joining us
today and look forward to hearing your ideas.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. I appreciate your
having this hearing today.
This is the Committee's second hearing on reauthorization
of NFIP. As we have discussed before, flooding is the most
common and costly natural disaster facing our constituents
today. At my every Thursday morning coffee, there were a number
of people there today interested in it. In my State, it may not
be as important on the surface as a number of other States, but
it clearly matters in pretty much every State of the Union. So
thank you to the witnesses. Thank you for the work you have
done.
With a growing population and a changing climate, our
entire Nation will continue to grapple with this issue in the
years ahead. Many often associated flooding with coastal States
that bear the brunt of devastating hurricanes, like Katrina and
Superstorm Sandy. We know this is an issue that affects people
in my State and all other States. The sheer power of heavy
rainfall combined with a river, stream, or other body of water
can have tragic and costly results, as we are seeing right now
in the Midwest.
In my own State, northwest Ohio, the flattest part of the
State and generally the lowest part of the State, is also under
threat of flooding today.
NFIP seeks to combat the effects of flooding through four
interrelated components: flood insurance, floodplain
management, floodplain mapping, and mitigation. Because these
activities are intertwined, it will be important for us to be
aware of how policy changes in one area can affect others.
Today we will hear stakeholders' views about
reauthorization and the path forward for NFIP. I am also
interested to hear your views about the implementation of
authorizing bills we enacted in 2012 and 2014. FEMA is still
working to implement many of these changes.
I look forward to continuing to work with Chairman Crapo
and the Members of this Committee to strengthen the NFIP and
the country's comprehensive approach to mitigating flood risk
through a timely reauthorization, and we recognize, of course,
the date of expiration. It is important for homebuyers that
Congress not let this program expire.
Thank you.
Chairman Crapo. Thank you, Senator Brown.
Today we will first receive testimony from Steve Ellis,
vice president of Taxpayers for Common Sense, on behalf of the
SmarterSafer Coalition.
Next we will hear from Michael Hecht, president and CEO of
Greater New Orleans, Inc., on behalf of the Coalition for
Sustainable Flood Insurance.
And then, finally, we will hear from Larry Larson, director
emeritus and the senior policy advisor for the Association of
State Floodplain Managers.
I want to remind our witnesses that we ask you to keep your
oral testimony to 5 minutes. Your written testimony will be
included in the record, and you will have ample opportunity to
respond and supplement your first statements.
I also want to remind our Senators to honor the 5-minute
rule in their questioning.
With that, please proceed, Mr. Ellis.
STATEMENT OF STEVE ELLIS, VICE PRESIDENT, TAXPAYERS FOR COMMON
SENSE, ON BEHALF OF THE SMARTERSAFER COALITION
Mr. Ellis. Thank you, Mr. Chairman. Good morning, Chairman
Crapo, Ranking Member Brown, Members of the Committee. I am
Steve Ellis, vice president of Taxpayers for Common Sense, a
national nonpartisan budget watchdog. Thank you for inviting me
to testify on the National Flood Insurance Program. With the
recent flooding in several States, this hearing is tragically
timely. My sympathies are with those who are affected by those
floods.
Taxpayers for Common Sense is allied with SmarterSafer, a
coalition in favor of promoting public safety through fiscally
sound, environmentally responsible approaches to natural
catastrophe policy. The coalition ranges from free market and
taxpayer groups to consumer and housing advocates to
environmental and insurance industry groups.
The NFIP is nearly $25 billion in debt and must be reformed
to ensure it is financially sustainable, has sufficient
incentives for reducing future flood damages and
vulnerabilities, provides better protection for taxpayers, and
that it promotes mitigation solutions that have long-term
benefits.
SmarterSafer released a reform proposal in February. TCS
supports this proposal and I request it be included in the
record.
Chairman Crapo. Without objection.
Mr. Ellis. The four main recommendations are:
Risk analysis and mapping must be up to date and must
provide property level elevation data.
Rates must be tied to risk, with assistance for mitigation
and premium support for low-income homeowners.
Increased Federal investments and efforts on mitigation
both at a property level and community wide so that we are
reducing rates by reducing risk.
And ensuring consumer choice and private sector competition
which will also reduce taxpayer exposure.
To help people understand their risk and ensure proper NFIP
rates, maps must be up to date and accurate, and property
elevations or effective proxies must be known. Private
companies already perform assessments of risk to individual
properties--something that is not currently reflected in FEMA
maps. FEMA must be required to update its maps, include the
best science on known conditions and risks, but also conduct
(or purchase) property-level (or close to) risk assessments.
FEMA should be required to assess elevation at a higher
resolution or conduct more granular analysis. This is something
that is possible. The State of North Carolina has undertaken a
mapping effort where they have not only gotten property level
data at a reasonable cost, but they have a digital system to
allow property owners to search and understand their risk,
potential flood premiums, and mitigation options.
The Government Accountability Office has documented large
cross-subsidies in the program, many of which benefit high-
income homeowners, finding that over 78 percent of subsidized
properties in NFIP are located in counties with the highest
home values, while only 5 percent of subsidized properties are
in counties with the lowest home values.
Rates in the program must over time be linked to risk while
understanding that there may be some in the program who will
need assistance in order to pay higher rates or reduce risk.
Masking subsidies with lower rates prevents policyholders from
understanding their true level of risk. A 2014 FEMA report
noted that the presence of subsidies ``removes the incentive to
undertake mitigation efforts, thereby encouraging ever
increasing societal costs.''
Instead, premium assistance should be targeted to those who
need it and encourage and fund mitigation measures that could
serve to reduce rates by reducing risk. These mitigation
efforts should be targeted at higher-risk and lower-income
property owners.
In April, the GAO noted: ``Prioritizing mitigation over
premium assistance could address the policy goal of enhancing
resilience because it would involve taking steps to reduce the
risk of the property, thus reducing the likelihood of future
flood claims and potentially reducing long-term Federal fiscal
exposure.''
Also, as rates gradually increase, there is more incentive
for individuals and communities to mitigate. We know that each
dollar of mitigation reduces post-disaster costs by $4 or more.
The private sector is now writing first dollar flood
insurance, even in the highest-risk areas. There are roughly 20
companies writing private flood insurance in Florida, home to
nearly 40 percent of NFIP policies. A majority of these are
writing flood coverage in the highest risk areas.
Competition provides consumers choice in flood policies,
instead of forcing homeowners into a one-size-fits-all
Government policy. It also takes risk off of taxpayers. I
request to include for the record a recent analysis done by the
Reinsurance Association of America on Florida Citizens Property
Insurance Corporation, a State-run, subsidized wind insurer.
Chairman Crapo. Without objection.
Mr. Ellis. They reviewed an initiative to get the private
sector to ``take out'' policies, resulting in a two-third
policy reduction for the program. Instead of choosing only low-
risk properties, private insurers took out properties across
the risk spectrum, including those along the coast in the
highest-risk areas. This left a smaller, stronger insurance
program that could meet its obligations.
Senators Heller and Tester's Flood Insurance Market Parity
and Modernization Act clarifies that private flood insurance
can be used to meet mandatory purchase requirements and puts
the regulatory responsibility where it belongs--on the State
insurance commissioners. A version of this bill passed the
House last year 419-0.
I strongly believe the burgeoning flood insurance industry
will lead to more homeowners purchasing needed flood coverage.
Finally, there is no need for the Federal Government to
further extend into the catastrophe insurance market through
reinsurance or increasing coverage limits or other means.
Thank you very much for the opportunity to testify today. I
look forward to your questions.
Chairman Crapo. Thank you very much, Mr. Ellis.
Mr. Hecht.
STATEMENT OF MICHAEL HECHT, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, GREATER NEW ORLEANS, INC., ON BEHALF OF THE COALITION
FOR SUSTAINABLE FLOOD INSURANCE
Mr. Hecht. Thank you. Good morning, Chairman Crapo, Ranking
Member Brown, and Members of the Committee. I am honored to
speak to you today about reforming and modernizing the National
Flood Insurance Program. My name is Michael Hecht, and I am
president and CEO of Greater New Orleans, Inc., the 10-parish
economic development organization for southeast Louisiana.
Since April 2013, GNO, Inc. has led the Coalition for
Sustainable Flood Insurance, a national alliance of
approximately 250 organizations across 35 States. We were
formed in the wake of the implementation of the Biggert-Waters
Act, when homeowners across the Nation began to see
skyrocketing rate increases due to a combination of the removal
of grandfathering and new and often inaccurate maps. CSFI
became a driving force behind the passage of the Homeowner
Flood Insurance Affordability Act, which was signed into law in
March 2014.
As was made clear in these previous debates, there is no
simple answer to the complex puzzle of flood insurance.
Simultaneously maintaining premium affordability, keeping the
NFIP on sound financial footing, and accurately communicating
risk is indeed a challenge. But it is in the national interest
to recognize that, first of all, all 50 States have experienced
floods in the past 5 years; and, second, that many of these
communities exposed to flood risk are vital hubs of domestic
energy production, international trade, finance, agriculture,
and other nationally significant economic and defense
activities. Simply put, affordable and sustainable flood
insurance is integral to ensuring that these communities
continue their vital contributions to America. With this in
mind, CSFI is focused on advocating for a better framework,
recognizing the complexity but also the importance to America
for getting it right.
There are four primary areas in which we are advocating for
this framework. We denote them by the acronym of AP, or MMAP.
The first ``M'' is mitigation. The long-term solution to
flood insurance absolutely lies in mitigation--reducing the
risk of flood losses before a disaster occurs. This is clearly
the best means of reducing economic loss and protecting
taxpayer interests, and it is vastly preferable to ejecting
households and businesses from NFIP via unaffordable flood
insurance premiums.
The second ``M'' is mapping. Enhancing the way we assess
and communicate risk through improvements to the mapping
process will protect communities and the NFIP over the long
term. The more accurate information that we have, the better.
The ``A'' is for affordability. Premiums must remain
affordable in order to keep communities across America
economically viable.
And the final ``P'' is for program participation. Adopting
policies that encourage more people to buy flood insurance will
make both the program more financially sustainable and help
communities recover more quickly after an unexpected event.
Of note, last week, Senator Bill Cassidy and Senator
Kirsten Gillibrand released a discussion draft that includes
many of the provisions for which CSFI is advocating, and I
strongly urge the Committee to give the legislation thoughtful
consideration as we move toward reauthorization.
In terms of mitigation, despite our current coordinated,
multilayered approach to flood mitigation, substantial sums of
taxpayer funds are appropriated each year in response to
disaster damage caused by flooding. Aggressively addressing
flood risks at the regional and community levels while
providing homeowners options and resources to lower flood risks
will save lives and properties and reduce flood damage, claims,
and premiums. A policy that could be included would be
redirecting premium insurance surcharges included in HFIAA
actually toward mitigation in the first place. That could be
$400 million annually for mitigation.
In terms of mapping, accurate mapping is fundamental to
assessing and communicating risk and pricing it appropriately.
The current mapping process often results in communities having
to fight inaccurate maps that do not take into account locally
built protection features or building off inadequate mapping.
So, for example, in the 2016 floods in Baton Rouge,
Louisiana, over 80 percent of flood victims did not have flood
insurance. I know it is easy for those of you not from
Louisiana to question why they did not have flood insurance
given what has occurred in Louisiana over the past 12 years.
The answer is that many of those communities were not mapped
into a flood zone or were only in optional purchase areas. More
accurate mapping would have prevented this.
In terms of affordability, this is the bedrock of our
policy. When homeowners across the Nation face skyrocketing
premiums, legislators reasserted the long-held view that
premium affordability is fundamental. So in policies to
maintain affordability, preserving grandfathering is most key.
And then, finally, under program participation, we have to
recognize that, unfortunately, NFIP participation is declining.
According to FEMA, we have gone down from 5.7 million in 2009
to only 5.1 million now, almost an 11-percent decline. A policy
to potentially address this would be to offer a default opt-out
flood policy as a standard part of the homeowners flood
insurance package. NFIP could be directed to test offering
consumers a default flood insurance option whereby homeowners
would be required to actively decline, or opt out of, flood
insurance coverage when they get their general homeowners
insurance.
Finally, we do think that the private market can play an
important role in terms of bringing discipline into this
market. We should just do it in a thoughtful and considerate
way.
In closing, four parts of MMAP: mitigation, mapping,
affordability, and participation. I thank you for the
opportunity to speak with you today about reauthorizing and
reforming the National Flood Insurance Program and for your
service to America. The Coalition for Sustainable Flood
Insurance stands ready and willing to assist the Committee as
we work to reauthorize by September 30th.
Thank you, Chairman.
Chairman Crapo. Thank you, Mr. Hecht.
Mr. Larson.
STATEMENT OF LARRY LARSON, DIRECTOR EMERITUS, ASSOCIATION OF
STATE FLOODPLAIN MANAGERS, INC.
Mr. Larson. Thank you, Chairman Crapo, Ranking Member
Brown, and the Committee, for holding this important hearing. I
am Larry Larson, director emeritus of the ASFPM, whose 17,000
members include many of the boots-on-the-ground State and local
people who actually implement this program and working with
their private sector partners.
I will begin by emphasizing that the NFIP is not an
insurance program. It is the Nation's major flood risk
management program that happens to have four legs to it, and we
have talked about those already this morning: mapping,
floodplain management, flood mitigation, and flood insurance.
All of those work together, and you cannot upset one without
making sure the others are not adversely impacted.
The program benefits not only policyholders but all
taxpayers and communities. For example, building compliant with
NFIP standards saves nearly $2 billion a year, most of which
would be picked up in disaster relief by the Federal taxpayers.
The 1.2 million miles of flood mapping in the country will
allow not only policyholders but citizens, emergency managers,
insurance agents, and the rest to have the information they
need to take action to reduce that risk.
The mitigation programs in the NFIP--Increased Cost of
Compliance, part of the policy, and Flood Mitigation Assistance
program are cost-effective, resulting in $5 saved for every $1
invested. These programs have provided $1.3 billion in
mitigation since 1997. They not only help individual property
owners, but strengthen neighborhoods, communities, and reduce
blight. And while the NFIP can always be improved, we do not
believe it is broken, and it does not need massive reform, but
it can use some reforms.
We are pleased to see the bipartisan comprehensive NFIP
reauthorization discussion draft from Senators Cassidy and
Gillibrand that was previously mentioned. It has some good
ideas that we would like to see pursued. At the same time, we
are concerned about the 10-year reauthorization timeframe. We
do not believe that it is appropriate, and I think Congress
needs some more oversight during that period of time.
Our written testimony today, while it covers 20 specific
reform ideas, I am going to concentrate now on four of them.
First is to deal with the debt, not only the current debt
but the long-term solution to the debt. If the debt in Katrina
had been resolved after Katrina, the NFIP would have been able
to handle Sandy without additional borrowing. That is the
reality.
Second is to reaffirm your commitment to and enhance the
Flood Mapping Program. The 2012 act had an excellent mapping
section. I think Congress did a great job on that, and we need
to continue and finish the job of mapping. Many maps in rural
districts, for example, in your States have not even yet been
developed. Only a third of the Nation's streams and coasts have
been mapped. We need to get mapping ahead of development. If we
do not get it ahead of development and development occurs
without regulation, without guidance, then FEMA comes in and
maps it, and then everybody gets upset. People not only are
annoyed because they think they were put in a floodplain, which
was always, of course, there, but now they have built too low
and their flood insurance premiums are too high. So we need to
get ahead of that development.
Third is to strengthen the mitigation components of the
NFIP. ICC has some existing authority in the law that is not
being fully implemented. We think that that is important and
that ICC must be available in addition to the basic policy
beyond the limits.
Finally, there are many interested in promoting private
flood that we have heard about this morning. Congress must
ensure the other three elements of the NFIP are not weakened
and that the NFIP and private flood are on an equal footing. We
can grow the policy base, but to do that, two critical reforms.
First is the requirement that private flood policies must
meet the mandatory purchase requirements of the NFIP and pay an
equivalency fee because they use the maps and they use the data
that are necessary. Currently, the fee pays for 100 percent of
the floodplain management to help 22,000 communities, and it
pays for roughly half on the flood mapping. For every million
policies lost to the NFIP, the NFIP will lose $50 million to
run the program. The policy fee is not a tax. It is a user fee,
and we need to make sure that we understand that.
Second is the requirement that private flood policies
should only be sold in NFIP-participating communities so that
we do not lose that policy base and the communities belonging
to the program so we can guide future development in losses. We
need to do that to make sure we do not increase future disaster
costs.
Thank you very much.
Chairman Crapo. Thank you very much, Mr. Larson.
I am going to switch places with Senator Scott on our list
on the Republican side here and let him go first. He has got
something he has got to get to right away. So, Senator Scott,
please proceed.
Senator Scott. Thank you, Mr. Chairman. And thank you, Mr.
Chairman, for hosting this hearing that is very important to my
State of South Carolina. I will tell you that I have spent
about 15 years as an agency owner for Allstate writing flood
insurance policies, responding to flood insurance claims, going
to homes that have been flooded, and watching the families try
to piece their lives back together.
As a Senator in 2015, we had the 1,000-year flood in South
Carolina that devastated so many families, and, unfortunately,
as I was going door to door in Sumter, South Carolina, some of
the folks did not have flood insurance. I would venture to say
almost no one had flood insurance policies in Sumter, South
Carolina, because they did not think they needed flood
insurance policies because, based on the maps, they did not
need flood insurance policies.
This is very concerning to me as we want the NFIP to be
there not only for South Carolina but for States all across the
Nation. Mr. Hecht, you testified that all 50 States had
experienced flooding. And if I heard you correctly, 40 percent
of all those policies, so about 5.1 million policies in force,
two out of five of all the policies written are in the State of
Florida. That means that Florida and South Carolina and other
States are disproportionately represented, along with North
Carolina, but at the same time, in Louisiana, at the same time,
when you circle those three or four States, you probably have
75 to 85 percent of all the policies, which means that we are
carrying a disproportionate burden on the flood issue, though
the flood experience is nationwide.
Did I understand that correctly?
Mr. Hecht. Yes, Senator, that is correct, that the vast
majority of the policies are in Louisiana and Florida and some
parts of the east coast. But we do know now that we can
experience flood across the country, and that really nowhere,
even areas in the mountains, can experience flooding.
Senator Scott. Does that not reinforce the necessity--and
the panel can discuss this, if you would like--for nationwide
mapping and for it to be as clear and accurate as possible?
Mr. Hecht. Yes, sir, I would agree for nationwide mapping,
and I think the issue of accuracy is critical. We want to know
to as granular a level as possible, using new technology, the
actual risk of actual individual properties.
Senator Scott. Mr. Ellis.
Mr. Ellis. Absolutely, Senator Scott. I think that we all
agreed, I think, in our testimony that mapping is critical, and
doing it nationally, and then also, as I cited, you know,
leadership from States like North Carolina where they did LIDAR
data down to higher-risk areas, that this is actually possible
and it is actually reasonable pricing.
Senator Scott. Yes, sir. Any comments, Mr. Larson, before I
go on?
Mr. Larson. Yes, I agree with you. Our mapping report
indicates that the entire Nation should be mapped and can be
for about $4 billion, what we have already spent for mapping,
because we have a lot better technology, and LIDAR mapping will
really make it accurate.
Senator Scott. Thank you, sir.
Another concern of mine is that everyone has talked about
the importance of mitigation, and my understanding is that
about 1 percent of the policies in the NFIP represent about 30
percent of the claims, and that the repetitive loss
conversation and issue, that some properties, those properties
actually have had two or more claims in the last 10 years, and
a part of mitigation should be considered as it relates to
those policies that have loss after loss after loss and are
rebuilding and rebuilding and rebuilding.
I am not much for mandates, but is there any conversation
about voluntary buybacks or something where we would eliminate
that exposure?
Mr. Hecht. Senator, I think that for some properties, that
might be an appropriate conversation. For many others, it might
simply be an issue of increasing the Increased Cost of
Compliance coverage so that individuals do have adequate funds
to raise their homes or otherwise mitigate and prevent future
incidents.
Senator Scott. Thank you.
Mr. Larson. Increased Cost of Compliance is the most
effective mitigation tool the NFIP has. It is there immediately
for the property owner, and it helps them recover quickly, and
we do need to expand it and use it broadly.
Senator Scott. Mr. Chairman, I am running out of time, but
I do want to submit a question for the record and perhaps get
the answer later, because you have been very kind and gracious
with your time. But I know in South Carolina there are parts of
our State where zoning regulations have allowed for more
construction that appears to have exacerbated the situation for
homeowners where apartments have been built and the easements
and the way that you design the drainage system, it drains down
in the neighborhoods. I would love to hear your response to the
need for us to coordinate with local officials to prevent and/
or absorb some of the costs associated with those changes in
zoning that have an impact on others.
Thank you.
Chairman Crapo. Thank you. And to the witnesses, you can
answer that question in writing afterward, and you probably
will receive other questions from Senators that we will ask you
at the conclusion of the hearing to respond to.
Senator Scott. Thank you, Chairman.
Chairman Crapo. Thank you, Senator.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
This is a question for all three of you, starting with Mr.
Larson, and then Mr. Hecht and Mr. Ellis, if you would. Some
have proposed means-tested subsidies like vouchers to help
lower-income homeowners afford flood insurance. Starting with
you, Mr. Larson, give us your thoughts on such an approach. If
you support it, how do you think it should be structured and
how would we administer it?
Mr. Larson. We like that idea of low-cost loans for
mitigating the properties. Rather than subsidized insurance,
which goes on forever and ever, as you know, we have already
done 48 years in the NFIP. If we help subsidize mitigation,
then the property is safer; the property owner can afford the
insurance, and the taxpayer helps pay off that loan in some
ways. But then the process is over, and we do not have to keep
going back and back.
So I think it can work. It may have to happen outside the
NFIP. But the process, as you know----
Senator Brown. What do you mean outside----
Mr. Larson. In other words, rather than cross-subsidizing
that money out of the fund, flood insurance fund, it may need
to be appropriated funding, because there are benefits to the
taxpayer as well as the other policyholders.
Senator Brown. OK. Mr. Hecht.
Mr. Hecht. Senator, I do agree as well that since
affordability is the fundamental issue, this is one way to get
at that by helping low- and moderate-income individuals. We do
not have a framework right now, and I apologize. We can come
back with some thoughts on how to implement that. But I would
like to emphasize what Mr. Larson said, and that is that to the
degree that we can put funds into mitigation up front and
outlay that expense today, we are going to save the need to
subsidize down the road. Long-term mitigation is the solution
for this challenge.
Senator Brown. OK. Mr. Ellis.
Mr. Ellis. Thank you, Senator Brown. We certainly agree, I
mean, the best way to reduce rates is by reducing risk and make
the insurance more affordable. That said, what we have
supported and is in our policy proposal, both SmarterSafer and
Taxpayers for Common Sense, is some means-tested assistance for
homeowners that need it, and so we have done it at 80 percent
of the median income, and basically our housing allies in the
SmarterSafer Coalition have pointed to, you know, working
with--being creative in setting up loan programs or using
existing loan programs, for instance, with the FHA to help
homeowners do their mitigation up front, and then also--but in
some cases, we are going to have to provide subsidies.
And the last thing I would say is what is really critical
is to have that done outside the rate structure so that the
rate is a risk indicator to people so that people need to know
what their risk is, and the way you know that is if you see you
have a high rate, you still may be paying less, but you
actually have that risk communication factor. So we also would
say that is critical, too, Senator.
Senator Brown. How did you settle on the 80 percent of
median income?
Mr. Ellis. My understanding is that is the standard for a
lot of the housing programs, as far as for low-income
assistance, and so I really would rely on--we can get back to
you on that more, but I would really rely on the National
Housing Council Coalition, which is a member of SmarterSafer.
Senator Brown. OK. Thank you. And also, for the whole
panel, we hear about FEMA's existing Cooperating Technical
Partners Program meant to increase local participation in the
data-gathering and mapping process. Each of you in written
testimony expressed the need to improve flood map accuracy and
increase outreach to local communities in the mapping process.
Mr. Larson especially talked about obviously the more and more
useful technology.
My questions are this: Has the Cooperating Technical
Partners Program given communities sufficient opportunity to
contribute data and knowledge of local conditions in the
mapping process? And, second, are there ways that we could
improve this to get the full benefit of the local expertise to
build local capacity and limit expensive appeals? Mr. Ellis, do
you want to start with that?
Mr. Ellis. I have not been as much involved in the mapping
process. We have made recommendations as far as improving it,
and so as far as the communities, I think that Mr. Hecht and
Mr. Larson would actually be better able to answer that
question for you, sir.
Senator Brown. Mr. Hecht.
Mr. Hecht. Thank you, Senator. I think that the impulse to
have locals provide more information is better because it will
give us more data and also, of course, locals understand what
their man-made and natural features are.
The challenge that we see in southeast Louisiana is that
those communities that have more funds and more bandwidth are
able to do this. Those that simply do not have the funds or the
manpower to do so simply do not. And so increasing their
capacity through some type of grant or other funding mechanism
might be a way to help increase the data coming from local
counties.
Mr. Larson. We strongly support the CTP program. Some
communities, usually the ones that have capability, and States
being CTPs know what is going on in their communities within
their States. Having them help with the mapping programs makes
for making sure everything is included up front, so we are not
missing areas that are going to be developed tomorrow and all
those sorts of things. CTP is a very good program that needs to
be expanded.
Senator Brown. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
I will take my questioning period now. First I want to
focus on prioritization. Between 2008 and 2012, our program,
the NFIP, sought 17 short-term extensions and lapsed four times
in 2010. That process was not healthy for policyholders or for
the market. During this reauthorization effort, we must work
together and deliver an on-time product.
To each of you, I would like you to just respond on how we
narrow the set of issues, if that is what becomes necessary,
and deliver an on-time product. In other words, how would you
balance between taxpayer protection reforms and affordability
and mitigation reforms, balance or prioritize among them? Why
don't we start with you, Mr. Ellis?
Mr. Ellis. Thank you very much, Mr. Chairman. We certainly
support and want to see the reauthorization done before
September 30th of this year. But it is also very critical to
get it right because it is likely to be a 5-year
reauthorization, and so we are going to be stuck with that for
that period of time.
And so, as you listen to the panel, I think that we have
highlighted areas of mapping, mitigation, affordability, but
also continue to move toward risk-based rates, and then, last,
private competition. So, for instance, the legislation that
passed the House last year 419-0, we think that should be a
critical part of it as well.
Chairman Crapo. Thank you.
Mr. Hecht.
Mr. Hecht. Thank you, Senator. I do think that getting this
done and continuing is critical. I will remind everybody as
well that September 30th is the middle of the flood season, so
that timing is very particular to those of us that are in those
areas, and the market is looking for reassurances so that they
can continue and homes can continue to close.
In an attempt to try to get our arms around this to
prioritize, we did come up with the acronym of MMAP, or AP.
Within that, I would say that the ``A,'' the affordability, is
kind of the fundamental bedrock of this program working going
forward. That being said, long term, the first ``M,''
mitigation, is the way that we actually work our way out of
this over time. And then within that, mapping using
improvements in technology and participation, getting
individuals who should have flood insurance to carry it, are
incremental improvements we should try to make by September
30th.
Chairman Crapo. All right. Thank you.
Mr. Larson.
Mr. Larson. Yes, if we look at those four legs, I concur
with much of what has been said. Mapping, let us get the
mapping done. Let us get that mapping ahead of development, and
that means let us invest in the mapping. We now have the
technology to do that.
Flood risk management, let us make sure all 22,000
communities that are now in the program stay in the program and
not drop out because, oh, they can go to the private sector and
get their insurance.
So then let us get on to mitigation, and I agree with what
Mr. Hecht has said. That is how we work our way out of this
affordability issue. So we have got to be able to help those
who cannot make it, because most of the unaffordable stuff is
properties that have been there for a long time, long before
there was an NFIP. So we have got to help them get out of that
process. So by doing that, I think we start on that process,
and then we balance that, because that is how the taxpayer
reduces their long-term cost. This program was created to
reduce disaster costs. So those ties must be together.
Chairman Crapo. Thank you. And, Mr. Larson, a consistent
recommendation we hear from stakeholders is to modify mapping
for better accuracy and risk assessment. We have heard it here
today. Significant attention was given to mapping in the 2012
and 2014 reforms, and FEMA is continually receiving feedback
from the Technical Mapping Advisory Council. Is it a question
now of simply providing adequate funding to get the job done?
Or do we need additional reforms and improvement of the mapping
programs?
Mr. Larson. By and large, FEMA is now in a position to
produce good, accurate maps. Technology has done that. LIDAR is
a big issue. So funding LIDAR and getting that completed for
the Nation through USGS--they are doing a fabulous job, but
that needs about 8 year's worth of funding for that digital
elevation program.
The technology in hydrology and hydraulics is there.
Remember, in your 2012 act, you said, FEMA, you need to make
sure you take into account future conditions. So that has not
yet been incorporated, but needs to be--sea level rise, for
example.
Chairman Crapo. All right. Thank you very much.
And one last question. It is no secret that the NFIP is in
poor financial condition. Mr. Wright testified in our last
flood insurance hearing that there is no practical way for FEMA
to repay the $24.6 billion in debt that they have amassed. Some
of you have talked about in your testimony the structural
challenges the program still faces. Mr. Ellis, can you
provide--and I am just about out of time, so very quickly,
please--additional details on your top two priorities to
strengthen taxpayer protections in the program?
Mr. Ellis. Well, certainly it is to continue the movement
toward risk-based rates and to actually only provide subsidies
to those who actually need it, and then funding mitigation. So
those would be the top priorities.
Chairman Crapo. All right. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Thanks to the
panel. I am glad we are still focusing on this issue on behalf
of the Committee. I appreciate the Committee's leadership in
this regard.
In the aftermath of Superstorm Sandy, we experienced the
best and the worst of the National Flood Insurance Program--
painful frustrations, endless delays, in some cases outright
fraud on behalf of private contractors of FEMA.
Now, many have said that we should eliminate the NFIP and
simply leave homeowners and communities at the mercy of private
insurance companies. I think property values would drop,
causing a housing crisis, housing stock that is coming back. So
while some might think privatizing the program is a simple
solution, the truth is far more complicated and dangerous.
Mr. Larson, what would be the impact on rates,
accessibility, and community resiliency if the NFIP was
eliminated?
Mr. Larson. Well, it would be dramatic, not only for the
real estate industry but for the people involved. So I do not
think--we need to go much further to incorporate the private
sector. In the end, someday we may want community-based
insurance where the communities do the right things in order to
keep their insurance rates down, tying those things together.
But in the meantime, we have got to make slow transitions
toward that and making sure we do not lose the NFIP along the
way, and those other key three legs. It is important to do
that. You cannot just eliminate the NFIP.
Senator Menendez. So when we talk about the financial state
of the program, much has been made of the debt largely occurred
as a result of failures of flood levees by the Army Corps of
Engineers in Louisiana in Hurricane Katrina. It is about $12
billion. And some have argued that premiums should be increased
dramatically to get the program back on sound financial
footing.
I for one think the rates are already incredibly high for
so many families, and instead of continuing to ask them to pay
more, we should do better to control costs and make the program
run more efficiently.
One of the biggest costs to the program is fees paid to
private insurance companies to service policies and adjust
losses. In fact, approximately one-third of all premiums goes
to these private insurance companies and their vendors, with
that number reaching 42 percent after Sandy. And what makes
this number even more egregious is the fact that these
insurance companies do not bear any risk. The NFIP covers all
losses and insurance companies profit risk-free.
In fact, the GAO has found repeatedly that FEMA does not
know the actual costs of their contractors, nor how much profit
they are bringing in. As the report said last December, I
quote, ``FEMA continues to lack the information it needs to
determine whether its compensation payments are appropriate and
how much profit is included in what it pays Write Your Own
companies.''
So it is no surprise then that policyholders as a whole are
paying over 50 percent more for private insurance companies to
administer policies than for FEMA to do it themselves.
So, Mr. Hecht, are homeowners getting their money's worth
with private insurance companies serving the NFIP?
Mr. Hecht. Thank you, Senator, for that question. I think
that there is a lot of complexity to this that has to be looked
at. If you look at the commissions that the Write Your Owns are
getting, the largest percentage of that I think is what is
getting paid to the individual agents, in some cases upwards of
20 percent. And the question is: Is that the appropriate
amount?
Another question is: Should you get paid the same amount
for writing a policy as you get for simply renewing it year
after year?
We should also consider about whether as premiums go up,
maybe the percentage should go down because you are doing the
same work, but you are getting more funds.
And then, finally, on the flip side, I think there is a
consideration to can we do things to actually reduce the
complexity of the program itself so that the administration of
it in the field requires less steps and is inherently less
expensive. A lot of ways to take a bite of this apple.
Senator Menendez. When you have no liability and all the
upside, you know, that is--we would all like to have that
business. But it is also challenging to me when we talk about
increasingly moving to a more private-sector based insurance
that at the end of the day, what happens when you get companies
that will cherry-pick the properties that are the least
possible loss consequence and then what is left.
I just do not know how we ask homeowners to pay higher
premiums to cover $400 million per year in interest payments to
ourselves, to the Federal Government, mostly because of that
levee failure in Louisiana. That is pretty crazy.
And a final point. We need to do, I would say, Mr.
Chairman, a lot more on mitigation. If we look at what we
spend, we spent $277 billion on disaster assistance from 2005
to 2014, with FEMA only designating a mere $600 million to its
pre-disaster mitigation program. That is 461 times more money
that we spent on recovery from a flood than mitigating against
one. And I think we need to be looking at that mitigation
element significantly as part of controlling costs, and I
appreciate the Chair's attention.
Chairman Crapo. Thank you, Senator Menendez. We appreciate
your interest and help on this.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
First of all, I think there is a real need for the
nationwide mapping to be expedited and then maintained. In my
former life, I was a insurance agent. We had an insurance
agency with multiple locations around the State of South
Dakota, and we were one of the agencies that actually sold the
Write Your Own products, I believe, through separate carriers,
and it truly simplified the process of being able to assist our
clients, our customers, who were writing homeowner policies.
I am just curious because it seems to me that--and I should
also say this: I am also a recipient of a flood insurance
policy. I have a flood insurance policy that I purchased on a
home in 2011, and I continue it in effect. And in doing so, I
kind of learned a little bit more about the program than what I
really wanted to at one point, and I can tell you that while I
have never had a loss on a homeowner's policy, I thought I was
going to with regard to the National Flood Insurance Program.
There is a provision, and particularly with those in the
areas that have been identified as having a lower risk than
other areas--and I am going to lay this out, and maybe you can
look at this. But in a Category A situation, as an example, you
can buy a quarter-million dollars of insurance coverage for
flood for about $300 a year, with about a $5,000 deductible, or
something like that, if my memory serves me correct. And yet a
lot of homes today, particularly newer homes going up, easily
exceed $250,000 in value.
One of the rules that any insurance underwriter will tell
you is that you insure to value or you have a coinsurance
clause of some sort placed on the policy, because if you do
not, regardless of which part of the risk is lost, the company
actually pays from dollar one or after a deductible.
So you could have a half-million-dollar home sitting in a
fairly protected class that still buys flood insurance, but you
have committed yourself, when you buy or sell a quarter-
million-dollar policy, that you are going to pick up the first
quarter-million dollars in losses.
There is no insurance company out there that does that on
any other type of a risk. Every underwriter out there
understands that if you want more premium dollars,
particularly, as I call it, ``healthy premium dollars,'' you
allow the value in those areas, in those areas which are
actually healthy premium dollars, profitable premium dollars,
to go up.
I think one of the simple ways to actually bring more
premium dollars into the program is to invite higher limits to
be sold in some of those areas. You are going to pick up the
first quarter-million no matter what, and yet you ought to be
able to collect premium dollars on closer to the full value of
a home.
This was first done, these numbers, a quarter-million, was
put in in 1984. Even at 2 percent, you should easily be at
$400,000 as an upper limit. And, remember, you are going to pay
the first quarter-million no matter what you do today. So why
not collect the premium dollars based upon more dollars
actually at risk, but with a higher percentage of not having to
pay anything out, if you follow me.
And then along with that, it seems to me that--and I would
like your thoughts on that, but along with that, it seems to me
that we ought to be making it easier for the rest of those
private carriers out there to write a flood insurance,
particularly in those areas that have a lower risk across the
country, every homeowner policy, whether it is a special form
or a broad form policy--most of them write a special form
today--all have an exclusion for flood insurance--or flood. But
if there was a provision to allow for an add-on feature in
those areas that have the least amount of risk but for people
that want to be risk averse to buy that product as a part of a
homeowner's policy as an add-on, it seems to me that we could
add a lot of, once again, healthy premium dollars back into the
mix to help offset the losses in those higher-risk areas. And I
would like your thoughts on that, if you could. And, once
again, I have used up most of my time making a statement, but I
would like that. And if we run out of time, I will ask it for
the record.
Mr. Ellis. Thank you, Senator Rounds. We do not support
expanding the program. The private sector is there. There are
private sector alternatives to add on to carry that extra
dollar. I understand your point, but from our perspective, it
is better to limit the risk to the taxpayers.
And then on your second point, just trying to be brief, we
definitely think that there should be the ability to do add-ons
to the policy. But we also think that the private sector can
write in a lot of these areas, both the high-risk areas and the
lower-risk areas.
Mr. Hecht. Thank you, Senator. I actually agree with your
point, spoken like somebody with years of experience in the
industry. I believe that the Cassidy-Gillibrand bill does
actually double potential coverage to $500,000 for homes and $1
million for business.
And then to your second point, the idea that we are
exploring this, could you have actually an opt-out that is
there by default when you are closing on your home as part of
your homeowner's insurance that many people would simply opt in
by default to carrying flood as part of their overall policy?
Maybe you could modify RESPA to make that happen.
Mr. Larson. I agree on the caps, increasing the limit.
Private insurance is already being sold by numerous companies,
so I am a little confused about why we need to open up the
market more. It is already happening.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
you for your testimony today.
I want to dig a little deeper into the issue of the flood
maps and the accuracy of the flood maps. As I understand it, a
few years ago there was an Executive order from the Obama White
House that requires FEMA to take into account the impact of
climate change in projecting flooding. Is that the case? Mr.
Larson.
Mr. Larson. Well, all the agencies, it was said in your
decision-making process try to include climate change in that
Executive order. It was also in BW-12 that essentially said you
need to look at future conditions when you are doing the
mapping.
Senator Van Hollen. Right. And so, in your opinion, are we
adequately taking into account all those future conditions,
including sea level rise at this point in time?
Mr. Larson. As you know, the maps that were done, for
example, after Sandy still do not include sea level rise. FEMA
has not yet been able to incorporate those issues. There are
some steps that need to happen. We also, in terms of climate,
need to have some agreement across the Federal agencies and the
experts upon what--you know, are you going to use this number,
this number, or this--you know, we need to have some agreement
on that process.
Senator Van Hollen. In terms of the level of sea level rise
projected?
Mr. Larson. Correct, for example.
Senator Van Hollen. And do you know of any process ongoing
now that would do that? After all, President Trump recently
eliminated an Executive order from the previous Administration
that was supposed to look at mitigating the impact of climate
change. I do not know if that is impacting this program at all
at this point.
Mr. Larson. I think at this point we need to get the
processes into place, and that really has not started yet. I do
not know that it will be----
Senator Van Hollen. So let me just ask, because this is
obviously--as you pointed out, adequately projecting for the
impact of sea level rise is directly related to, you know, the
accuracy of the mapping. So do you have any recommendations as
to what needs to be done in order to do this and do it as fast
as we need to do it?
Mr. Larson. I think the agencies--the Corps of Engineers,
FEMA, USGS--those technical agencies can get together and
agree. What are going to use for sea level projections? Are we
going to use the upper-middle? Are we going to pick the middle?
What is the appropriate one? They agree on it, we all start to
use that. Same thing with increased intensity of storms. As we
know, storm intensity has gone up 45 percent in some areas, 60
percent in others, in the Northeast. So we need to have some
agreement on the process we are going to use and the
appropriate hydrology we are going to use for those. And it is
broad across-the-board increases amongst the players involved.
Senator Van Hollen. I do not know if any of the other
witnesses have----
Mr. Hecht. Well, I would just add one kind of corollary
point to this, Senator, that we also need to allow for partial
mapping. We need to allow counties, or parishes in our case, to
adopt parts of the map that they think do reflect current and
future conditions while they still work on the others. I think
more granularity as well as better projections will give us
better mapping over time.
Senator Van Hollen. Mr. Ellis.
Mr. Ellis. We certainly agree, Senator Van Hollen, on the
granularity, and then also about really trying to adjust to
where the maps are not just a static line on a piece of paper
or a digital line, but actually risk assessment and getting
more toward that characterization, which is what we have
testified on.
Senator Van Hollen. Right, and I think especially in
Louisiana and other places, we have seen dramatic flooding
outside--you know, more than the 100-year flood projections
would suggest, especially with these heavy-rain downfalls.
Let me ask you all a question. The Trump administration's
skinny budget that was submitted calls for a $190 million cut
to the appropriation for mapping of NFIP programs. Can you all
let us know what impact that would have on our ability to do
what all of you gentlemen are talking about the need to move
forward?
Mr. Larson. Well, essentially what is happening is that
appropriated money is kind of what is paying for new maps. The
fee income that is coming in kind of keeps the program running
and works with the communities and the maps. So appropriated
money is really needed to get mapping done in the Nation. That
is why we support the Cassidy-Gillibrand that says let us do
$500 million a year for 10 years and get the mapping done for
the entire Nation and get ahead of that development.
Mr. Ellis. Senator Van Hollen, I will just add that I think
in the skinny budget it failed to recognize--I mean, they claim
that it was because all the costs should be internalized to the
program and failed to recognize the benefit to communities and
to outside that are not necessarily in the program, but knowing
what the flood zones are, whether you are going to place a
hospital, and knowing that you do not want to put that in a
special flood hazard area or other infrastructure. And so there
is greater benefit than just to the people who are paying NFIP
policies.
Senator Van Hollen. I appreciate it. Thank you. Thank you
all.
Chairman Crapo. Thank you.
Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. Gentlemen, thank you
for being here. I am from North Carolina and proud to have
been, as part of the State legislature, on the forefront of
getting funding to advance mapping in the State, and hopefully
we can make progress on a national basis.
Mr. Hecht, you made a comment that I want to go back, and
some of my questions are in line with Senator Menendez's. If
you accept that half of the $24 billion debt right now is
related to the events from Katrina and Rita, then the other $12
billion may speak to some of the business practices that we
need to take a look at compensation structures for the Write
Your Own, for the insurance companies that are working in the
program.
Do you feel like we have adequate controls, or do you feel
like that at least our relationship with these third parties is
similar to the kinds of relationships other insurers have with
third parties in terms of compensation models and reimbursement
models? I will start with you, but anybody who would like to
opine on it.
Mr. Hecht. Thank you, Senator. I think it is clear that we
need more information and better data and comparisons to the
private sector in this. We do not get from the GAO and others
enough data to understand really the fidelity of that
relationship.
Senator Tillis. The sort of fundamental process, as you
alluded to, in terms of compensation structures, sound like
they were maybe circa 1970s compensation structures. Mr. Ellis.
Mr. Ellis. Senator Tillis, certainly we agree that we need
to have more data and we need to be able to compare to the
private sector. I would also--and make sure that we are in
alignment and recognizing the amount of risk, or not risk, that
these companies are taking on. And I am speaking for Taxpayers
for Common Sense here.
But, also, you know, I think that Senator Menendez's
argument also makes the case for more private sector
involvement in flood insurance. I mean, then you do not have
the Government making some of these decisions about what are
the compensation structures, what is this? It is actually a
competitive marketplace, and companies are going to pay their
agents what is going to get them to be able to sell more
policies.
Senator Tillis. I would tend to agree with that.
I want to move on to something else and stay within time,
and that is the ICC program. I have received a fair amount of
feedback from various governmental agencies that feel like they
would like to see some changes that really allow for more
demolition and acquisition, and we have actually proposed to
the Banking Committee a few things, one having to do with claim
limits, and I was just trying to go through some of the major
provisions, raising--the claim limits should be raised to at
least 60,000. I will not get into the specifics of the
provisions.
But what they are saying is we would like to actually
acquire property, demolish buildings, remove the threat. Do you
all generally think the changes to the ICC program that would
lead to that end are something we should consider? Mr. Larson.
Mr. Larson. I think definitely the ICC should be moving in
that direction. We have communities in Charlotte-Mecklenburg
that are trying to use ICC for those purposes, and it is----
Senator Tillis. I live in Mecklenburg.
Mr. Larson. Yes, right. And so the ICC can be that tool,
but it needs to be opened up to allow the tool to be used.
Senator Tillis. Yes, and I think we need it to be more
agile. One thing that we have suggested is waiving rulemaking
requirements so that it could be--remove impediments,
basically, to making ICC changes so that we could act more
swiftly.
Mr. Hecht.
Mr. Hecht. I agree as well. Mr. Larson made a subtle but
very important point up front, which is that the National Flood
Insurance Program is not really an insurance program. It is a
land-use policy. I think as part of that, we should be smart
about how we manage our lands and our building going forward.
Senator Tillis. You see that in Mecklenburg County, down in
Fayetteville, which was hard hit by Matthew. There are a number
of instances where, if we reform this program, we can remove
the future threat in flood-prone areas, and that is why I am
hoping the Committee will indulge us on some of the suggestions
that we have made for the program changes.
Also, with respect to mapping, you said something
important, and that is having the level of granularity so that
you can really rate for the risk. When I first moved to North
Carolina in 1998, I bought a house on Lake Norman, and I had to
get flood insurance. Now, my physical structure was 12 feet
above a 1-mile dam down the river on Lake Norman, and there was
maybe about a 10-square-foot part of my beach that was in the
floodplain, and I had to get insurance. So that is actually an
area where perhaps I did not--or if I had to get it, it should
not be at the level that others that are sitting at the level
of the dam. And I think that granularity with mapping is the
way that we get through those disparities.
Mr. Hecht. As well, Senator, with structures and the type
of structure and whether it is integral to your primary
residence.
Senator Tillis. Yeah, so if there is no structure there----
Mr. Larson. And the new mapping does that. LIDAR will do
that. It will get that granularity.
Senator Tillis. It may have been one of the reasons why I
supported the funding at the State level.
[Laughter.]
Senator Tillis. Thank you, Mr. Chair.
Chairman Crapo. Thank you.
Senator Tester.
Senator Tester. Yes, thank you, Mr. Chairman. Thank you for
having this hearing.
I have just got a couple questions, and this is for you,
Mr. Ellis. You spoke of the bill that Senator Heller and I
have. I just want to get your perspective on if you believe
Congress should pass a multiyear authorization. And if that
reauthorization were to pass, would that help us build out a
private insurance program, working in tandem with NFIP, or
would it not?
Mr. Ellis. I certainly think that it would help build out a
private insurance program, and your legislation, which we
strongly support, simply clarifies something that was already
in Biggert-Waters that said that you can have a private flood
policy to meet the mandatory purchase requirement.
And then, second--and I think this is really important--it
does have the provision about that you can go back and forth
from NFIP to the private sector back to NFIP without losing any
grandfathering or anything else like that.
And then, last, it is important that it puts it into the
insurance commissioners--the State insurance commissioners are
the ones who will be regulating it.
Senator Tester. So we have got two different lines to go on
this. The first one is I think there is some heartburn with our
bill or with the private insurance that if the event comes, the
insurance will not be there to the degree that they need it.
Could you talk about that and how we can ensure that the
private insurance would be just as good as any other insurance
that is out there?
Mr. Ellis. Well, that is certainly going to be the job of
the State insurance regulators, making sure that policyholders
are not being duped or are getting a bad product.
And then the other thing, I think--and this kind of came up
when I was talking about having sort of a policy rider added
on. Senator Rounds was talking about this. You know, the more
we make flood insurance to be a normal insurance product,
something that people just get or their insurance agent asks
them, ``Do you want this?'' we are going to get more people
covered. I mean, right now we already have a problem with
adverse selection. The only people buying flood insurance are
the people who are the most likely to need it. We should see
more people buying flood insurance, as Senator Scott mentioned
about the people in South Carolina, how so many of them did not
have flood insurance, and that is the real tragedy. And it was
pointed out by FEMA in previous testimony that in the flooding
that happened in Louisiana a year or so ago, the average NFIP
payment was about $87,000. If you did not have flood insurance,
you got about $9,000 in disaster assistance. And so that is a
real problem, and so we want to see more and more people buying
flood insurance.
Senator Tester. OK. So has anybody done any actuarials on
if private insurance competition would help bring down the
rates?
Mr. Ellis. Certainly it seems--you know, the only reason
why you would go to a private sector policy over an NFIP policy
is if you got a better rate or a better policy or both. And so
certainly that is what we are seeing, and we have seen--you
know, as I mentioned in my testimony, there are about 20
companies writing private flood insurance in Florida, where
there is 40 percent of the NFIP policies. And so, clearly,
there is some interest because somebody is buying those
policies.
Senator Tester. One last question, and any of you can
respond to these, by the way. I am picking on Mr. Ellis, but it
does not necessarily have to be that way.
There are some that will say if the private insurers get in
the market, they will cherry-pick the policies that have less
potential for a claim, and it will leave the National Flood
Insurance Program with only the policies that have the most
likelihood of flooding. Could you respond to that?
Mr. Ellis. Well, the Reinsurance Association of America,
their analysis--and we are trying to look at this as an analog
of the Florida windstorm insurance and the depopulation of that
where they had the private sector come in and take out
policies, about two-thirds of the policies out of the program.
We found that they took policies from coastal areas, from all
over the place. And then, second, the flood insurance companies
that are writing in Florida, more than half of them are writing
in the V zones, so in the higher-risk areas. So, clearly, there
is an appetite for risk.
And that gets to the last point, which is if you are an
insurance company, if you do not take on risk, you are not
going to make money. And so, clearly, that is part of the
incentive, because a lot of the flooding--and FEMA will tell
you this--occurs outside of the high-risk areas. So you are
writing a lower insurance rate policy, but you are still going
to have to pay claims. So you want to get a higher rate of
return by writing higher-risk policies.
Senator Tester. OK. And so we have--and I live on the
Northern Plains, OK? So flooding is not something that we have
much of--not that it could not change with climate change. But
we have a situation where storms are happening in places they
have not happened before, and then flood insurance is like, for
instance, crop hail insurance, if you do not get hailstorms
very often, you pay a pretty low rate. I would imagine it is
the same thing for flood insurance.
What do you say for those companies that may be insuring in
places where the flood is very unlikely, but it seems like
those unlikely events are happening with more regularity, 100-
year events are happening with more regularity?
Mr. Larson. Well, we see more of that happening all the
time. Storm intensity is happening. I mean, we call things ``a
1,000-year flood.'' Well, it is not a 1,000-year flood at all.
It may be a 1,000-year rainfall, but not a flood. So we will
see companies dealing--the advantage of private is adding to
the base. As long as we do it in a way that does not upset the
four legs of the NFIP and pulls it out so that communities
start dropping out of the NFIP, because if they do that, we
will not be guiding future development, and that needs to
happen in a balanced fashion.
Senator Tester. Well, I just want to thank you all for your
testimony and appreciate your answers.
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. I want to thank
all three of you gentlemen. I have learned a lot listening to
you today. I especially want to thank Mr. Hecht. He has become
an expert the Flood Insurance Program and is recognized as such
in my State, and I think here in Washington, DC.
Mr. Ellis, let me ask you, I will start with you, if I
could. As I appreciate it, you want to give more authority to
the State insurance commissioners?
Mr. Ellis. We want to, in the Heller-Tester bill,
essentially have them be the regulators of the private
insurance market. Yes, sir.
Senator Kennedy. OK. They have done a good job with health
insurance. In my State--I cannot speak for other States, but in
my State, the main job of our insurance commissioner is to hold
fundraisers with the insurance industry. I am just going to be
blunt.
Mr. Ellis. Well, I can say, Senator, you know, earlier
Senator Menendez talked about the experience of his
constituents dealing with FEMA and the Write Your Owns, and in
that case, they would have been able to go to the State
insurance commissioner to hold those companies to account,
which was not happening with FEMA, sir.
Senator Kennedy. Right.
Mr. Larson. I would like to remind people that the fraud
that happened in Sandy was done by the private sector. It was
not FEMA changing the reports. So is there--the concern with
this will upset the national program by not looking at how this
will apply to four legs of a stool. So insurance commissioners
in all 50 States will now treat it differently? That is a
little concerning.
Senator Kennedy. Yeah, if they will do their job, and if
they are willing to make the insurance industry mad sometimes.
How much do you think, gentlemen, we could knock that $25
billion debt down if we stopped paying interest to ourselves?
Mr. Hecht. Senator, I think that the amount is about $400
million a year of that interest that could get applied to that,
or we could apply it toward mitigation to make the program more
sound over time. What we are doing right now, taking it out of
one pocket and putting it in the other, does not seem to be
serving anybody best interests over the long term.
Senator Kennedy. And that $25 billion, it is not like we
went down to the local bank and borrowed $25 billion and we
have got to pay interest. We are paying interest to ourselves,
right?
Mr. Larson. About $4 billion so far, and like I say, if the
debt after Katrina would have been forgiven, the NFIP could
have handled Sandy without additional borrowing.
Mr. Ellis. I would just flag, Senator, that is how
intergovernmental debt is treated across the board, including
things like Social Security and other areas.
Now, if we wanted to talk about not paying interest, I
would certainly entertain that at Taxpayers for Common Sense.
But I just want to flag that is the standard for how Government
operates.
Senator Kennedy. OK. And, Mr. Ellis, I am not disagreeing
with you. You make really good points. I am all for--I mean, I
am a taxpayer, and I believe in common sense, too. So I am with
you.
[Laughter.]
Mr. Ellis. I appreciate that, Senator.
Senator Kennedy. If you do not mind me asking, where do you
live?
Mr. Ellis. I live in DC.
Senator Kennedy. OK. Do you carry flood insurance?
Mr. Ellis. No. I rent a condo, and so I am well above----
Senator Kennedy. OK. Well, let me tell you part of the
problem. I am going to make a----
Mr. Ellis. One thing I would just add, sir, is that I was
an officer in the Coast Guard, and so I have definitely dealt
with flooding and those issues. And so I understand that.
Senator Kennedy. I did not mean to insinuate you are not--
please, that is not what I meant.
Let me make a prediction on your condo, OK? You get 26
inches of rain in 2 days, you are going to flood. You are not
in a floodplain. You live on Mount Everest, you get 26 inches
of rain in 2 days, you are going to flood. And that is what
makes this whole situation difficult.
But in my State, I will tell you what the--it does not do
any good to give people insurance if they cannot afford it. We
tried that with the Affordable Care Act. It did not work. So
you have got to start with affordability, and there is nothing
wrong with starting with affordability.
I want to ask Mr. Hecht a question. Can you explain what
would happen in Louisiana, Mr. Hecht, if--we have got over
100,000 policyholders. What would happen if the lower-risk
policies were moved to private insurers and the commercial
properties were exempted? What do you think would happen?
Mr. Hecht. We would see slowly the decimation of our
coastal communities.
Senator Kennedy. Kind of like with Biggert-Waters.
Mr. Hecht. What we began to see was a spiraling where
people could not afford their homes. They were going to walk
away from them. That was going to impact the banks. That would
then impact the tax base. It is a cascading effect, sir.
Senator Kennedy. Look, I think everybody was well
intentioned with Biggert-Waters. But 150 years ago, doctors
used to believe their patients with the best of intentions. If
it killed their patients, they stopped doing it. So it is
really easy to talk about risk-adjusted rates, but we do not
live in ``La La Land.'' That is a movie.
Mr. Ellis. I would just add, Senator, we have talked about
affordability, and affordability is part of our proposal. We
want to make sure that people are able to have flood insurance,
and we would like to see more Americans carry flood insurance.
Senator Kennedy. You ought to buy some.
Mr. Ellis. Thank you very much, Senator.
[Laughter.]
Senator Kennedy. Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
thank you, gentlemen. I apologize. I have a simultaneous
hearing in Armed Services, so I could not be here for the
entire testimony.
Mr. Larson and Mr. Hecht, the Flood Insurance Program does
much more than just provide flood insurance. It provides flood
assistance, flood mapping. It provides mitigation assistance,
outreach, oversight. If we go more toward a private marketplace
of flood insurers, can you comment on or suggest actions we can
take to maintain these other aspects of the Flood Insurance
Program? Mr. Hecht, please.
Mr. Hecht. I apologize. Could you repeat the beginning of
the question? I was talking to the Senator as you--I apologize.
[Laughter.]
Senator Reed. Let me repeat it. The Flood Insurance Program
provides much more than simply reimbursement to people who
suffer damage: flood mapping, mitigation, a whole host of
issues that are critical to communities and critical to
resiliency. If there is a more pronounced private insurance
aspect, how do we in Congress maintain those activities for the
National Flood Program? Do you have any ideas or suggestions?
Mr. Hecht. I think it is a critical point that we
understand that those structures remain in place and that FEMA
is mandated and is funded to do so, mapping and mitigation,
again, being the two key things that over time are going to
reduce the risk for the entire system. And so I do think it is
critical that we do not simply say we are going to leave this
to the private sector, that we go toward a hybrid model that
increases competition and the discipline of the program, but
does not abandon those pillars of long-term sustainability.
Senator Reed. Mr. Larson, please.
Mr. Larson. Yes, you know, some of the private sector
insurance industry is saying, well, there should not be a
policy fee on the private sector, and that the taxpayers should
fund that through appropriations. My answer to them is as soon
as you get Congress to appropriate $250 million to take care of
those other activities, we will get rid of the policy fee. But
unless we have a level playing field, the whole house of cards
comes down.
Senator Reed. Thank you.
Mr. Ellis, you are looking at a private sector that you
would and I think we would all suggest has more flexibility. Do
you think we should give the NFIP more flexibility in terms of
insurance, what they can do so they can be more competitive
with the private sector, so that people really do have choices?
Mr. Ellis. I think that there is, Senator, problems and
challenges within the NFIP, and it is a program that exists--I
do not think that exists to provide flood insurance to people,
but I think that expanding it and trying to compete with the
private sector, it kind of gets away from what the initial
intent was. Basically, the reason why we created NFIP in 1968
or Congress created NFIP in 1968 was because of the failure in
the private marketplace. The private marketplace now wants to
write flood, so why are we trying to crowd them out or
outcompete them with the NFIP program?
Senator Reed. Well, they want to write private flood
insurance if they can make money on it. But as 1968 suggested,
there are many parts of the country and areas where they do not
think they can make money, and then that leaves not an
opportunity but, I would argue, an obligation for us to step
in.
One of the issues, too, you know, you have pointed out how
in Florida, for example, there is a very active private market.
Coming from a coastal State, the Ocean State, I have noticed
that a lot of the homes around the coast are quite expensive,
and I believe there are limits on what the NFIP can write. I
think it is $250,000 for the structure, $100,000 for contents.
So, frankly, a lot of the private sort of flood insurance are
necessitated because the value of the home is way beyond what
could be done. So, you know, that is where I think the private
insurers are coming in, and they are doing very well because
they can charge rates to those homeowners that are, you know,
cost-effective for them.
Mr. Ellis. But they are actually doing first dollar
insurance in Florida, Senator, and we assume--and part of it is
because just like NFIP reflects, 40 percent of NFIP is in
Florida because that is--I mean, as much as it is the Ocean
State in Rhode Island, you know, there is a lot more----
Senator Reed. But, again, I think when we look at this
private participation, some of it is as a result of very
expensive real estate located--and it is not just Rhode Island.
It is the gold coast of Florida and other places where the NFIP
program, if it would be taken up by these--but they are too
expensive, the homes.
So, again, I want to thank you gentlemen for your testimony
and for what you have been doing to help us go through this and
think about it. Thank you.
Chairman Crapo. Thank you, Senator Reed.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
So Congress enacted the Biggert-Waters Flood Insurance
Program Reform Act to make the National Flood Insurance Program
more financially sound and to accurately reflect the true cost
of flood insurance.
Now, as part of the plan to achieve those goals, right now
some Senators want to dramatically increase the number of
private policies. And I am not against private sector
insurance, but there would be real costs to simply turning over
the Federal program to the private sector.
The NFIP has a four-pronged comprehensive flood risk
reduction program that is comprised of insurance, flood
mapping, floodplain management, and flood mitigation. And these
four missions, each of them is critical to reducing the impact
of dangerous floods. And each is funded, at least in part, by
user fees and surcharges added to the Federal premium.
So private insurance companies benefit from those services,
but private flood insurance does not contribute to any of these
other critical missions. As the number of private policies
grow, it is critical that the private sector contributes its
fair share to the flood management functions of NFIP.
So, Mr. Ellis, let me just start with you. You have
previously testified before Congress, stating that--and I am
going to quote you here--``The primarily private sector program
is where flood insurance is heading, but Congress should be
intentional about this development and ensure the mitigation
benefits achieved by NFIP are retained and funds for mapping
maintained.''
Do you believe that private primary policies should include
NFIP equivalency fees and surcharges to ensure that the private
sector is sharing the national costs of flood mapping and
floodplain management?
Mr. Ellis. Taxpayers for Common Sense certainly believes
that, yes, Senator.
Senator Warren. Thank you.
Mr. Hecht, do you agree?
Mr. Hecht. Senator, I agree completely. If we consider that
mapping and mitigation are the long-term solutions for all of
America, then all of America should be supporting these
initiatives.
Senator Warren. All right. And, Mr. Larson, do you agree?
Mr. Larson. Yeah, the private sector should be on a level
playing field and pay the policy fee.
Senator Warren. So either everybody pays the fee or nobody
pays it, right?
Mr. Ellis. But, Senator Warren, one thing I would flag is
that it should be specifically delineated so that people know.
That is one of the problems with the Flood Insurance Program
now, that that fee has been kind of hidden into the overall
rate rather than actually being explicit.
Senator Warren. Fair enough. I am all for transparency with
consumers so they know what they are paying for. But those who
buy private insurance and those who buy public insurance should
be paying the same set of fees to get us forward in the future.
OK, good. I think this is just really important because
shifting to private insurance is not going to work if private
insurance does not contribute the fees we need to flood mapping
and floodplain management and flood mitigation.
So I want to ask another question, if I can, in the time I
have left. As we have heard, mitigation is a vital part of
NFIP's flood-resilient efforts. And, in fact, the GAO recently
reported that it estimated that for every dollar spent on
mitigation, losses were reduced by an average of about $4.
Now, Congress currently subsidizes NFIP rates to make flood
insurance more affordable, but mitigation loans could be
another tool to lower the cost of flood insurance. A Wharton
University study that you may be familiar with has shown that
low-interest loans to elevate or flood-proof structures in
high-risk areas could lower flood insurance premiums for many
homeowners and also decrease the Government subsidization
assistance.
So, Mr. Larson, when it is economically appropriate, do you
believe that offering mitigation loans to elevate flood-proof
or flood-proof high-risk homes can be an effective way for NFIP
to minimize flood risk and damage for homeowners?
Mr. Larson. Absolutely. Subsidizing mitigation rather than
subsidizing insurance is----
Senator Warren. Right.
Mr. Larson. ----actually the way you want to go, and, in
fact, the other side of that coin is those repeat losses, right
now, you know, the NFIP has no ability to ultimately say no, no
matter whether you have had claims five times the value of your
structure. Maybe that is something that should be considered,
too.
Senator Warren. I think this point about mitigation is kind
of opening a new lens that we should be looking at this. You
know, the Government typically offers low-interest SBA loans to
help homeowners rebuild after a disaster has damaged their
homes. I think it would be a smart idea for the Government to
do more to help homeowners prevent damage by making their homes
more resilient before damage strikes.
Mr. Hecht, you wanted to add on that?
Mr. Hecht. I did just want to say, Senator, we visualized
this about getting on the left side of the disaster curve. We
tend to always operate in the acute moment, and then in the
aftermath, we need to pull back to the left side, and everybody
is going to win--the Government, the taxpayer, the citizen.
Senator Warren. That sounds like a much more cost-effective
way to deal with this problem. Thank you very much.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you very much, Senator Warren.
That concludes the Senators' questioning, and that will be
the end of the hearing. I would like to thank our witnesses
again. Both your written and your testimony here today at the
hearing has been very helpful to us. We are going to continue
to proceed to meet the deadline and to beat the deadline and
get a reauthorization done on time. And we will continue to
seek your assistance, the witnesses, as we work on that
process. In fact, you can expect questions from Senators, I
assume.
I will tell all the Senators that we have 7 days in order
to submit those questions, and I will not put a time limit on
you, but please respond to the questions very promptly as we
will be moving ahead on this rapidly.
With that, the hearing is adjourned.
[Whereupon, at 11:25 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF STEVE ELLIS
Vice President, Taxpayers for Common Sense, on behalf of the
SmarterSafer Coalition
May 4, 2017
Good morning, Chairman Crapo, Ranking Member Brown, Members of the
Committee. I am Steve Ellis, Vice President of Taxpayers for Common
Sense (TCS), a national nonpartisan budget watchdog. Thank you for
inviting me to testify on opportunities and challenges facing the
National Flood Insurance Program (NFIP). With the recent flooding in
several States just in the past week this hearing is tragically timely.
My sympathies are with those affected by the floods. TCS has worked on
flood insurance issues and reform of the program for our entire 21
years of existence and I've been involved in flood issues dating back
to my days as a young Coast Guard officer dealing with the aftermath of
the Great Midwest Flood of 1993. This is a critical issue for taxpayers
and smart public policy that protects people and property.
Taxpayers for Common Sense is allied with SmarterSafer, a coalition
in favor of promoting public safety through fiscally sound,
environmentally responsible approaches to natural catastrophe policy.
The groups involved represent a broad set of interests, from free
market and taxpayer groups to consumer and housing advocates to
environmental and insurance industry groups. \1\ For a decade the
coalition has advocated reforms in the National Flood Insurance Program
that ensure the program is smarter and safer for those in harm's way,
the environment, and for Federal taxpayers.
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\1\ Full list of groups is available at www.smartersafer.org.
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Though the NFIP provides critical insurance coverage to those at
risk, the program must be significantly reformed to ensure it is
financially sustainable, that there are sufficient incentives for
reducing future flood damages and vulnerabilities, that it provides
better protection for taxpayers who have repeatedly backstopped the
program, and that it better protects the environment and promotes the
use of nature-based mitigation solutions that have a long term benefit
for homeowners and the taxpayers.
SmarterSafer released a comprehensive flood insurance reform
proposal in February that is attached to this testimony as an addendum.
TCS supports this proposal and I request it be included in the record.
The recommended reforms are grouped in four main areas:
1. Risk analysis and mapping must be up to date and must provide
property level elevation data.
2. Rates must be tied to risk, with support for mitigation and
premium support for low-income homeowners.
3. Increased Federal investments and efforts on mitigation both at a
property level and community wide, so that we are reducing
rates by reducing risk.
4. Ensuring consumer choice and private sector competition which
will also reduce taxpayer exposure.
Background on the National Flood Insurance Program
It is important to understand the context of how the Nation got
into the flood insurance business. After years of ad hoc disaster aid
being meted out by Congress, the National Flood Insurance Program
(NFIP) was established in 1968 to create ``a reasonable method of
sharing the risk of flood losses through a program of flood insurance
which can complement and encourage preventative and protective
measures.'' \2\ The program was to make up for a perceived lack of
available flood insurance. But even at that time Congress was warned
that it was playing with fire. The Presidential Task Force on Federal
Flood Control Policy wrote in 1966:
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\2\ P.L. 90-448.
A flood insurance program is a tool that should be used
expertly or not at all. Correctly applied it could promote wise
use of flood plains. Incorrectly applied, it could exacerbate
the whole problem of flood losses. For the Federal Government
to subsidize low premium disaster insurance or provide
insurance in which premiums are not proportionate to risk would
be to invite economic waste of great magnitude. \3\
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\3\ U.S. Task Force on Federal Flood Control Policy. ``A Unified
National Program for Managing Flood Losses''. August 1966. p17. http://
www.loc.gov/law/find/hearings/floods/floods89-465.pdf
With the program nearly $25 billion in debt to taxpayers, it is
clear that the program has resulted in a waste of great magnitude and
not promoted a wise use of floodplains. In fact it represents a
significant lost opportunity to strengthen our country's protections
against natural disasters. Although subsidies were largely envisioned
to be limited and short-term, they weren't. And while the program has
encouraged standards and construction that help reduce flood risks for
participating communities, the availability of subsidized Federal flood
insurance over the last several decades made it financially attractive
to develop in high risk areas. Along with other factors, NFIP helped
fuel the coastal development boom that increased the program's risk
exposure and losses.
$25 Billion in Debt and Subsidized Rates
There is a general misperception that NFIP is financially healthy
but for a couple of large storms--namely Katrina and Sandy. However,
for years prior to Katrina, NFIP teetered on either side of solvency,
covering shortfalls with Treasury borrowing and repaying the loans in
years of surplus. Then in 2005, the inevitable happened--a catastrophic
loss year--and after Katrina, Rita, and Wilma, the program was roughly
$18 billion in debt to the Treasury. That was followed by the
Superstorm Sandy losses in 2012 which resulted in the program being $23
billion in debt to taxpayers.
Losses continue to grow, however, with 2016--as a result of
Hurricane Matthew and several other rain events--representing one of
NFIP's largest loss years with $3.7 billion in payouts triggering
additional borrowing from the Treasury. The program is now nearly $25
billion in debt to U.S. taxpayers. As storms and flooding become more
frequent and more severe, the debt in this program will only continue
to grow. Nuisance flooding, disaster declarations, and billion dollar
disasters are all on the rise; leaving the flood program as is
basically guarantees additional borrowing from the Treasury.
To put the program's debt into perspective, FEMA data indicates
that in 2016 the 5.1 million policies resulted in $3.3 billion in
premium to insure $1.25 trillion worth of property. \4\ The Government
Accountability Office has estimated that approximately 20 percent of
policies are explicitly subsidized and paying only 35-45 percent of
their actual full-risk level premiums. \5\ These numbers have likely
changed some subsequent to the enactment of the Homeowners Flood
Insurance Affordability Act of 2014, also known as Grimm-Waters.
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\4\ Federal Emergency Management Agency. Available at: https://
www.fema.gov/statistics-calendar-year.
\5\ Government Accountability Office. ``Flood Insurance: More
Information Needed on Subsidized Policies''. July 2013.
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As this Committee well knows, reforms to the NFIP were enacted in
the Biggert-Waters Flood Insurance Reform Act of 2012 to align premiums
with risk, which would not only help program solvency, but also help
policyholders better understand their risk and take measures to
mitigate that risk. Despite some concerns, TCS and SmarterSafer
supported the 2012 legislation while also favoring additional efforts
to help address affordability. Unfortunately, in Grimm-Waters, Congress
rolled back many of the reforms that would have led to more actuarial
rates. The rollbacks actually exacerbated the inequities in the
program, placing surcharges on policies to pay for continued subsidies.
The authorization for NFIP expires September 30, 2017. Before the
long-term reauthorization in 2012, NFIP required 17 extensions after
the 2004 reauthorization expired in 2009 and even occasionally lapsed
only to be temporarily reauthorized retroactively. We think all
involved should work together so the program doesn't lapse again. That
said, TCS believes that a 5-year reauthorization schedule is preferable
to a longer one that would delay adjustments and reforms to the
program. To put it in perspective, if the 2004 reauthorization would
have been for 10 years, the 2005 storm season and Superstorm Sandy
would have occurred in that time period with no opportunity to make
clearly needed reforms.
Risk Analysis and Mapping
FEMA is required to map the Special Flood Hazard Area (SFHA). This
delineates the area considered to have a one percent chance of flooding
in any given year (so-called 100-year floodplain) and therefore has a
mandatory purchase requirement for federally backed mortgages. These
maps are the backbone of the NFIP and are used to determine rates.
However, the flood maps do not look at property level risk or
elevation, and this means that there is a lack of confidence in maps
and the risk analysis provided by those maps. The current lack of
confidence in the flood maps hobbles FEMA implementation of the
program.
Mapping is both a challenge and an opportunity. Technology has
enabled greater level of detail and accuracy in mapping. It also can be
used by the private sector for more intensive risk analysis and
modeling that can benefit private sector flood insurance alternatives
(and NFIP as well) particularly in providing risk-based coverage in
areas outside the SFHA. In addition, flood claims should inform
mapping. While it is true that just because a property has never
flooded in no way guarantees it won't flood, the converse does provide
an indicator. Absent significant mitigation action for structural
changes, a property that has flooded is certainly at risk of flooding
again. Yet, in a three-part series published in early 2014, NBC News
documented instances where FEMA agreed to remap out of the floodplain
large condominiums built in previously flooded areas. \6\ One company
head that made the remapping program his business (only for commercial
properties, not residential) dubbed himself Robin Hood. Hardly. Maps
have to be accurate for both sides. Taxpayers and ratepayers.
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\6\ Dedman. ``Why Taxpayers Will Bail Out the Rich When the Next
Storm Hits U.S.''. http://www.nbcnews.com/news/investigations/why-
taxpayers-will-bail-out-rich-when-next-storm-hits-n25901-NBC-News
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Mapping also has to be smarter. Private companies are using tools
that enable property level mapping and elevation. The SmarterSafer
reform proposal includes requiring FEMA to move to a system of more
granular, property level mapping. This would not only ensure proper
risk analysis and rates, but it would take the onus off of homeowners
who now have to go through a burdensome and expensive process if they
believe they are mapped incorrectly. To ensure that maps are accurate
and inform property owners, Government officials, and the public at
large, SmarterSafer urges Congress to make revisions to FEMA's mapping
requirements. Many of these recommendations are consistent with those
of FEMA's own Technical Mapping Advisory Council.
To help people understand their risk and to ensure proper NFIP
rates, maps must be up-to-date and accurate, and property elevations
(or effective proxies) must be known. Private companies already perform
assessments of risk to individual properties--something that is not
currently reflected in FEMA maps. FEMA must be required to update its
maps, include the best science on known conditions and risks, but also
conduct (or purchase) property level (or close to) risk assessments.
The Government must continue to map for purposes of the Special Flood
Hazard Area designation (which triggers mandatory purchase
requirements); however, this is not enough. FEMA should be required to
assess elevation at a higher resolution or conduct more granular risk
analysis. This is something that is possible--the State of North
Carolina has undertaken a mapping effort where they have not only
gotten property level data at a reasonable cost, but they have a
digital system to allow property owners to search and understand their
risk, potential flood premiums and mitigation options. FEMA should be
required to move in this direction.
There are also many different Federal agencies that engage in
mapping. This should be more coordinated and shared among agencies to
avoid duplication. This is also where--and I know this is also outside
the committee's jurisdiction--the Nation's mitigation and pre-disaster
programs have to dovetail with NFIP and post-disaster response.
More needs to be done for the public to have a greater
understanding of their flood risk. As discussed earlier, FEMA is tasked
with mapping the SFHA for the mandatory purchase requirement. That is a
Federal mandate that isn't likely to change. However these maps are
static--lines on a map designating various flood risk areas and
charging various rates based on those risks. If a homeowner has an
elevation certificate that proves they are elevated ``out'' of the
floodplain they can have those rates adjusted. But the creation of the
rates are sort of a black box and it is not entirely clear that even
``full-risk'' rates are actuarially sound. \7\ In some cases there are
significant cross-subsidies where lower risk properties pay more to
maintain subsidies for higher risk properties.
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\7\ Beider. ``Understanding FEMA's Rate-Setting Methods for the
National Flood Insurance Program''. Congressional Budget Office.
October 7, 2014. Available at: https://www.cbo.gov/sites/default/files/
presentation/49441-femaratemethodsnfip.pdf.
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Risk-Based Rates, Targeting Mitigation, and Premium Support
NFIP has subsidized rates in the program virtually since its
inception, regardless of need. FEMA estimates 20 percent of properties
in the program pay subsidized rates, but that doesn't include
properties with grandfathered rates where the flood zone designation
has changed. Even with the properties that are paying supposed risk-
based premiums, the fact that the program can borrow from the Treasury
is a built in subsidy. The GAO has documented large cross-subsidies,
many of which benefit high-income homeowners. \8\ The Government
Accountability Office found that over 78 percent of subsidized
properties in NFIP are located in counties with the highest home values
(the top three deciles), while only 5 percent of subsidized properties
are in counties with the lowest home values (the bottom five deciles).
\9\ This represents a real challenge to the program's sustainability.
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\8\ Supra note 5.
\9\ U.S. Government Accountability Office. July 2013. Flood
Insurance: More Information Needed on Subsidized Properties.
(Publication No. GAO-13-607). Retrieved from: http://www.gao.gov/
assets/660/655734.pdf.
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TCS and SmarterSafer believe that rates in the program must over
time be linked to risk while understanding that there may be some in
the program who will need assistance in order to pay higher rates or
reduce their risk. Currently subsidies are effectively hidden from the
homeowner, which eliminates any price signal of risk or incentive to
mitigate to reduce the risk and thereby the premium. Masking subsidies
with lower rates prevents policyholders from understanding their true
level of risk. As was noted in the FEMA privatization report mandated
by Biggert-Waters, subsidized rates ``can promote (and have promoted)
poor decisions on the part of property owners and political
representatives . . . they also create a moral hazard, especially when
the subsidies are not well targeted.'' \10\ The report continues that
the presences of subsidies ``removes the incentive to undertake
mitigation efforts, thereby encouraging ever increasing societal
costs.''
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\10\ Oliver Wyman. Flood Insurance Risk Study: ``Options for
Privatizing the NFIP''. P60 Available at: http://www.floods.org/ace-
files/documentlibrary/2012_NFIP_Reform/
Reinsuring_NFIP_Insurance_Risk_and_Options_for_Privatizing_the_NFIP_Repo
rt.pdf.
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A far better approach is to target any premium assistance to those
who need it, and to encourage and fund mitigation measures that could
serve to reduce rates by reducing risk. These mitigation efforts should
be targeted at higher risk and lower income property owners.
While affordability must be addressed, we must also separate out
those who truly cannot afford their risk based rates and those who need
time to plan for rate increases, but for whom those rates would not
cause a substantial hardship. TCS and SmarterSafer recommends that as
rates move to risk-based, Congress ensure that there is assistance for
those in need--but it must be done in a means-tested, targeted, and
time-limited manner outside the rate structure. Under the SmarterSafer
proposal, low-income property owners would be eligible for this premium
support. However, premium support is not the preferred option for
reducing premiums--we should be doing more to reduce premiums by
reducing risk.
While noting some of the challenges of creating a premium
assistance program, an April 2017 Government Accountability Office
report on flood insurance noted: ``Prioritizing mitigation over premium
assistance could address the policy goal of enhancing resilience
because it would involve taking steps to reduce the risk of the
property, thus reducing the likelihood of future flood claims and
potentially reducing long-term Federal fiscal exposure.'' \11\
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\11\ Government Accountability Office. ``Flood Insurance:
Comprehensive Reform Could Improve Solvency and Enhance Resiliency''.
April 2017.
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We believe FEMA should be working to conduct cost-benefit analyses
so that subsidies can be used for mitigation where cost-effective. In
addition, FEMA should be required to work with private lenders as well
as the Federal Housing Administration to develop or modify existing
loan products that homeowners could use to mitigate thus reducing their
flood-insurance rates.
Increased Emphasis on Property and Community Wide Mitigation
Subsidized rates provide a disincentive to mitigation, but as rates
gradually increase there is more incentive for individuals, and by
extension communities, to mitigate. This should be encouraged by
further Federal investment. We know that each dollar of mitigation
reduces post-disaster costs by four dollars or more. \12\ Instead of
providing premium subsidies the goal should be to reduce rates by
reducing risk. Conversely, subsidizing rates does not reduce risk to
people and property, in fact it encourages people to develop or stay in
high risk areas. FEMA's subsidies should be used for mitigation where
possible and cost-effective. SmarterSafer's proposal also includes a
number of recommendations to better target mitigation funds to
homeowners and communities most at risk, to provide additional
flexibility for increased Cost of Compliance funds and to strengthen
the Community Rating System to incentivize nature-based mitigation
approaches.
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\12\ Multi-Hazard Mitigation Council. ``Natural Hazard Mitigation
Saves: An Independent Study To Assess the Future Savings From
Mitigation Activities''. Available at: https://c.ymcdn.com/sites/
www.nibs.org/resource/resmgr/MMC/hms_vol1.pdf.
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There is a greater benefit from larger scale, community wide
mitigation efforts than mitigating house by house or property by
property. In addition, this type of mitigation often becomes a
community amenity that can actually increase home values beyond the
flood damage reduction benefits alone. FEMA should establish a system
to promote mitigation of groups of adjacent properties in order to
maximize flood damage reduction and provide additional opportunities
for preservation of wetlands and other natural buffers against storm
surge and other flooding. Under the SmarterSafer reform proposal, FEMA
would be required to identify `Flood Hotspots'--communities with
clusters of, or significant numbers of, severe repetitive loss
properties and areas with a significant number of properties at high
flood risk. These areas would be required to work with FEMA to develop
plans to reduce flood risk, with a priority for nature-based,
nonstructural mitigation.
Consumer Choice and Private Sector Competition
Though for many years NFIP was the only viable option for flood
insurance, the private sector has begun to write first dollar flood
insurance, even in the highest risk areas. For instance, there are at
least 19 companies writing private flood insurance in Florida, home to
nearly 40 percent of the NFIP policies. A majority of these are writing
flood coverage in the highest risk areas, and many are providing much
higher coverage limits.
This provides needed competition in the flood marketplace--it
provides consumers choice in flood policies, instead of forcing
homeowners to purchase a one-size-fits-all Government policy that is
significantly limited. It also takes risk off of the Federal
Government, helping to stabilize the flood program and reduce the
burden on taxpayers. I request to include for the record a recent
analysis done by the Reinsurance Association of America (RAA) of a
comparable public insurance system for hurricane risk--Florida Citizens
Property Insurance Corporation, a State-run, subsidized wind insurer.
This analysis reveals the results of an effort to get the private
sector to ``take out'' policies from the program--an exodus of nearly a
million policies out of a million and half total. But instead of
choosing only low risk properties, private insurers took out properties
across the risk spectrum, including those along the coast in the
highest risk areas. This left a smaller, stronger State run insurance
program that could meet its obligations. While it is an extrapolation,
the RAA analysis concludes that private sector engagement in flood
insurance would ``be extremely beneficial to both policyholders,
taxpayers, and NFIP.'' \13\ Through private competition, purchase of
reinsurance and a continued move toward risk based rates, NFIP would be
able to meet its obligation in a 100-year flood with little Treasury
borrowing.
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\13\ Reinsurance Association of America. ``Private Flood Improves
NFIP's Stability''.
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S. 563, The Flood Insurance Market Parity and Modernization Act--
introduced by Committee Members Sens. Heller (R-NV) and Tester (D-MT)--
is the first step towards leveling the playing field for private sector
flood insurance and bringing competition and consumer choice to the
flood insurance marketplace. TCS and SmarterSafer believes that private
sector participation would increase coverage while decreasing the cost
for consumers, and should be encouraged. Consumers should be able to
choose private flood insurance policies, potentially with terms and
coverage that can be tailored to the interests of the consumer, as well
as better incentives for mitigation. In fact, private flood policies
could allow property owners to purchase enough coverage to ensure they
can rebuild after a storm, not constrained by NFIP limits or by the
amount of the mortgage.
S. 563 would ensure that private flood insurance counts for
purposes of the mandatory purchase requirements, and would also provide
an important consumer protection that ensures rate stability for
consumers if they leave NFIP for private coverage and then come back to
NFIP. This bill is merely a clarification that Congress never intended
for homeowners to be required to purchase flood coverage through the
Federal Government, only that they had to have coverage if they were in
the 100-year floodplain and had a federally backed mortgage. An
identical version of this bill passed the House of Representatives 419-
0 last year. This represents a broad, bipartisan recognition that
consumers should be given choices in flood coverage and the
unanticipated regulatory hurdle to acceptance of private flood coverage
should be addressed.
The idea is not that private companies will only compete for the 5
million polices in NFIP already covered by flood insurance. The goal is
to ensure that more people around the Nation purchase needed flood
coverage. Recent flooding events have sadly demonstrated that many
people who need coverage do not have it. The average NFIP payment for
the 2016 flooding in Louisiana was $86,500, the average individual aid
payment was $9,150. Absent flood insurance the homeowner is left with
low interest Small Business Administration loans to rebuild. Piling a
loan on top of a mortgage to rebuild a currently uninhabitable house is
not conducive to efficient and resilient rebuilding.
Also, there is no need for the Federal Government to further extend
into the catastrophe insurance market through reinsurance or other
means.
Additional Thoughts
Adverse Selection--The simple fact is that most of the people who
are purchasing flood insurance are those most likely to get a payout.
As I indicated there are 5.1 million policies in the program. According
to the U.S. Census Bureau there are 134 million housing units \14\ in
the country and even leaving out multi-unit structures--that could be
purchasing flood insurance--and commercial properties, roughly 5.4
percent of the houses in the country have flood insurance. Just about
everybody has some level of flood risk, but for the most part, unless
it's acute, they don't buy it. This means that NFIP as currently
structured is essentially a high risk pool covering the most at-risk
properties; the $25 billion in debt shows this to be the case. This
concentration of risk has put significant strain on the program,
particularly given the lack of risk based rates. The private sector
would most likely not concentrate all of their risk in flood, but would
have diverse risk pools; in addition they could write multi-peril
insurance that includes flood and other risks, making the pricing for
the peril less, and they can also lay off risk on the worldwide
reinsurance marketplace.
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\14\ http://quickfacts.census.gov/qfd/states/00000.html
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Reinsurance--FEMA's recent purchase of reinsurance demonstrated
that there is interest and capacity in the reinsurance markets to take
on U.S. flood risk. Obviously industry will have to gain a greater
understanding of the nature of the underlying flood risk in the NFIP
portfolio, but that can be managed through responsible data sharing.
Laying off risk on the private sector will help protect taxpayers from
debts racked up by future large storms.
Disaster Assistance--NFIP's inter-relationship with Federal
disaster aid programs under the Stafford Act is both an opportunity for
reform and a challenge to a more rational holistic Federal approach.
An observation from a the 2014 FEMA privatization report `` . . .
highly publicized instances of Federal aid following catastrophic
events have also created a public perception that individual property
owners do not need to insure against low-probability high severity
flood events, effectively creating moral hazard.'' \15\ What people are
not realizing is that the vast majority of the aid goes to rebuild
public and Federal infrastructure, not individuals to help them move on
after disaster. A 2014 study by the Wharton Center for Risk Management
and Decision Processes at the University of Pennsylvania found that
increasing disaster assistance by $1,000 reduced subsequent insurance
coverage by $6,000. \16\
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\15\ Oliver Wyman. Flood Insurance Risk Study: ``Options for
Privatizing the NFIP''. P52 Available at: http://www.floods.org/ace-
files/documentlibrary/2012_NFIP_Reform/
Reinsuring_NFIP_Insurance_Risk_and_Options_for_Privatizing_the_NFIP_Repo
rt.pdf.
\16\ Kousky, Michel-Kerjan, Raschky. ``Does Federal Disaster
Assistance Crowd Out Private Demand for Insurance?'' Available at:
http://opim.wharton.upenn.edu/risk/library/WP2013-
10_FedDisasterAssistance.pdf.
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Conclusion
There are a number of reforms that Congress should make when it
reauthorizes the NFIP to ensure the program is sustainable in the long
term. With better, property level mapping, a focus on mitigation and
risk reduction, a move to risk based rates with targeted subsidies, and
private sector competition, we believe NFIP will be strengthened and
more people will purchase needed flood coverage.
______
PREPARED STATEMENT OF MICHAEL HECHT
President and Chief Executive Officer, Greater New Orleans, Inc., on
behalf of the Coalition for Sustainable Flood Insurance
May 4, 2017
Good Morning Chairman Crapo, Ranking Member Brown, and Members of
the Committee. I am honored to speak to you today about reforming and
modernizing the National Flood Insurance Program (NFIP). My name is
Michael Hecht, and I am the President and CEO of Greater New Orleans,
Inc., the 10-parish economic development organization for Southeast
Louisiana. Since April 2013, GNO, Inc. has led the Coalition for
Sustainable Flood Insurance (CSFI), a national alliance of
approximately 250 organizations across 35 States. CSFI was formed in
the wake of the implementation of the Biggert-Waters Act, when
homeowners across the Nation were facing skyrocketing rate increases
through a combination of the removal of grandfathering and new maps,
which often times were inaccurate. CSFI was a driving force behind the
passage of the Homeowner Flood Insurance Affordability Act (HFIAA),
which was signed into law in March 2014.
As was made clear in those debates, there is no simple answer to
the complex problem of maintaining premium affordability, keeping the
NFIP on sound financial footing, and accurately communicating risk. And
it is in the national interest to recognize that many communities
exposed to flood risk are hubs of domestic energy production,
international trade, national and international finance, agriculture
production, and other nationally significant economic and defense
activities. Affordable and sustainable flood insurance is an integral
component of ensuring these communities continue their vital
contributions to America. CSFI is now focused on advocating for a
stronger policy framework for the NFIP that recognizes the economic,
cultural, defense, and other national contributions made by communities
exposed to flood risk.
There are four primary policy areas CSFI has focused on that will
provide for this stronger framework, denoted by the acronym ``MMAP'':
Mitigation--A comprehensive approach to reducing flood
losses before a disaster occurs is a more effective means to
reducing economic loss and protecting taxpayer interests, than
ejecting households and businesses from NFIP via unaffordable
flood insurance premiums
Mapping--Enhancing the way we assess and communicate risk
through improvements to the mapping process will protect
communities and the NFIP over the long-term
Affordability--Premiums must remain affordable in order to
keep communities across America economically viable
Program Participation--Adopting policies that encourage
more people to buy flood insurance will help to bring the
program's costs in line with revenues in a responsible way and
help communities recover more quickly following a flood event
My testimony today will explain the policy suggestions we've
proposed in this framework. CSFI has also produced a whitepaper series,
which has been submitted for the record, that makes the case for these
proposals in greater detail.
Of note, last week, Senator Bill Cassidy and Senator Kirsten
Gillibrand released a discussion draft that includes many of the
provisions for which CSFI is advocating. The Cassidy-Gillibrand
legislation will reform and modernize the NFIP; improve how risk is
assessed and communicated; keep insurance affordable; increase options
for mitigation; and, allow for some responsible private market entry
provisions, among other policy priorities. I strongly urge this
committee to give the legislation thoughtful consideration as we move
towards reauthorization on September 30.
Mitigation
Flooding is the most common natural disaster in the United States,
affecting communities in each of the 50 States and territories. Across
the Nation, States and municipalities have worked diligently to reduce
the frequency and impact of flooding in their communities even while
resources to reduce flood losses remain limited.
Effective flood mitigation is a multifaceted enterprise. The
Federal and State governments share significant responsibilities in the
planning, design, construction, and maintenance of major flood control
projects that protect hundreds of millions of homes and businesses. At
the community level, particularly those communities participating in
the National Flood Insurance Program (NFIP), Governments adopt and
enforce floodplain management standards and building codes. County and
parish governments that adopt stronger standards and participate in the
Community Rating System (CRS) achieve a greater level of flood
protection for the community that is reflected in reduced flood
insurance premiums.
Property owners have a key responsibility to reduce flood damage
and secure resources to comply with floodplain management and building
code requirements. Property owners may fulfill this responsibility to
protect property by purchasing flood insurance and Increased Cost of
Compliance (ICC) coverage. Appropriate flood insurance and ICC coverage
ensures flood damage is repaired and that damaged structures are
restored to a higher level of flood protection if required by current
floodplain management standards and building codes. Property owners
further have the obligation to work through local, State, and Federal
programs to mitigate high-risk structures having sustained repetitive
flood loss events.
Despite this coordinated, multilayered approach to flood
mitigation, substantial sums of taxpayer funds are appropriated each
year in response to disaster damage caused by flooding. This raises
important questions about the efficacy of the national flood loss
mitigation strategy and the efficiency of deploying substantial
taxpayer funds for disaster response while making limited investments
in disaster mitigation by comparison. Aggressively addressing flood
risks at the regional and community levels, while providing homeowners
options and resources to lower flood risks will save lives and
property, reducing flood damage, flood insurance claims, and flood
insurance premiums.
Federal policymakers must work with State and local governments and
individual property owners to reduce the frequency and expense of flood
losses. This necessarily requires allocating resources for disaster
prevention and flood loss mitigation. Reducing the exposure of our
communities, homes, and businesses to flood losses is a more efficient
and effective use of taxpayer resources and will reduce future disaster
costs and preserve flood insurance affordability.
Policies that would increase mitigation include:
Redirecting Premium Surcharges Included in HFIAA--The
Cassidy-Gillibrand legislation would require FEMA to reallocate
the existing surcharges established in HFIAA to better finance
the Pre-Disaster Mitigation and the Flood Mitigation Assistance
Programs. This proposal to redirect existing fees would yield
approximately $400 million annually for flood mitigation
activities
Modernize Increased Cost of Compliance (ICC) Coverage--
Currently, ICC claims payments must be used to fund up to
$30,000 in compliance costs associated with State or local
floodplain management laws or ordinances, which typically
require structure elevation. The limit of $30,000 is inadequate
to elevate most structures. Under the Cassidy-Gillibrand
legislation, FEMA will be required to increase ICC coverage to
$75,000 with $30,000 of ICC payments allowed to occur outside
policy limits
Provide a Premium Credits to Offset the Cost of Obtaining
an Elevation Certificate--This proposal would offer
policyholders without an elevation certificate a one-time rate
credit of $500 for the cost of obtaining elevation data.
Knowledge of flood risk and accuracy of a structure's base
flood elevation information will be enhanced by removing or
reducing the financial barrier associated with the acquisition
of elevation certificates. This policy proposal is included in
the Cassidy-Gillibrand legislation
Facilitate Mitigation Credits that Reduce Premium Rates--
The Cassidy-Gillibrand legislation would require FEMA to
develop meaningful cost reductions, in excess of 10 percent of
the current risk premium rate for a property, for flood
mitigation activities undertaken on properties in all zones,
including moderate risk zones
Partner with participating communities and State
Governments to obtain elevation data--NFIP should offer
Community Rating System (CRS) credit for participating
jurisdictions that require an elevation certificate to be
prepared at a subsequent transfer of title for structures in a
flood zone where elevation data are not available
Provide Effective Oversight of the U.S. Army Corps of
Engineers--While this is not germane to reauthorizing the NFIP,
I want to urge Congress to conduct effective oversight of U.S.
Army Corps of Engineers (USACE) procedures and project approval
timelines to ensure authorized flood control projects do not
languish, needlessly putting communities, homes, and businesses
at risk of flood damage
Mapping
Accurate mapping is fundamental to assessing and communicating
risk, and to pricing it appropriately. The current mapping process
often results in communities having to fight inaccurate maps that do
not take into account locally built flood protection features and
communities building off of outdated mapping, which results in
artificially inflated risk. We must question whether we can truly
determine actuarial rates if they are based on flawed mapping. Further,
many areas of the country are not mapped or mapped accurately, which
results in communities who are at risk of flooding unaware of the risk.
For example, in the August 2016 floods in Baton Rouge, Louisiana,
over 80 percent of flood survivors did not have flood insurance. I know
it is easy for those of you not from Louisiana to question why these
people did not have flood insurance given what has occurred in
Louisiana over the last 12 years. Here's the answer: many of those
communities were not mapped into a flood zone or were only in optional
purchase areas. Updated and accurate mapping and better communication
about risk when purchasing property could have limited the number of
uninsured properties significantly. This in turn could have resulted in
these affected communities needing less post-disaster funding, thus
saving the taxpayer. Technology around assessing and communicating risk
is also rapidly evolving, and FEMA should embrace this technology to
provide more accurate maps for America.
Proposals that could improve the way we assess and communicate risk
include:
Increasing the authorization for the National Flood Mapping
Program to $500M--The Government funding bill currently being
debated provides $177M for the National Flood Mapping Program,
which is a good start. For the next funding cycle, I urge
Congress to increase the authorization of the National Flood
Mapping Program to $500M, which would allow FEMA to accelerate
the completion of mapping of the entire country, would help
communities better understand and plan for risk
Allowing Counties to Adopt Portions of Maps at a Time--
Congress should require FEMA to allow communities to adopt
portions of a flood map that they agree with at one time while
still allowing for map appeals in other areas of the community.
The current policy puts the entire county's new map on hold
during the appeals process, which results in the entire
community planning land use policies around outdated maps and
some residents paying higher than necessary rates
The Cassidy-Gillibrand legislation also includes several policy
suggestions that would enhance the mapping process and should be
included in reauthorization, including:
Provide Mapping Standards and Guidelines for
Nongovernmental Entities--This proposal would authorize the
Technical Mapping Advisory Council (TMAC) to develop map
standards for FEMA and nongovernment entities, thereby giving
communities additional avenues to streamline the FEMA mapping
process and develop maps that use updated community data &
technology
Encourage the Use of High-Resolution Mapping Technology--
This proposal would instruct FEMA to facilitate, partner, and
leverage current high-resolution topographic data (e.g., Light
Detection and Ranging [LIDAR] data, or other new and emerging
technologies) in the development of flood insurance rate maps
Improve the Flood Mapping of Levee-Protected Areas--This
proposal would require FEMA to replace its ``Zone D''
designation (defined as an area of undetermined/undefined risk)
in levee-protected areas with risk zones that are more
appropriate for the level of protection that the flood
mitigation features afford
Affordability
Following the Biggert-Waters Act, when homeowners across the Nation
faced skyrocketing premiums, legislators reasserted the long-held view
that premium affordability is a fundamental tenet of national flood
insurance. In HFIAA, policymakers addressed premium affordability
concerns by restoring the practice of rate ``grandfathering'',
reversing the elimination of pre-FIRM subsidized (PFS) policies,
eliminating the property sales trigger, and increasing damage and
improvement thresholds. Those policies must be maintained in
reauthorization.
In HFIAA, Congress revised key policies driving substantial
increases in flood insurance premiums yet retained the Biggert-Waters
Act imperative to reduce or eliminate certain premium subsidies. In
general, HFIAA limits year-over-year premium increases to 18 percent
for individual properties and 15 percent for the average of all premium
increases within a risk classification. Premiums for most subsidized
policies must, by law, increase at least 5 percent on an annual basis,
subject to the overall limitation that NFIP not charge rates greater
than a classification's determined risk. Further, certain property
classifications will see premium increases designed to rapidly
eliminate subsidies.
Policies to maintain affordability include:
Formalizing 1 percent cost to value ratio--This proposal
means that no premium could be more than 1 percent of the
policy value. So, for example, a policy worth $250,000 could
never cost more than $2,500. Language was included in the
Homeowner Flood Insurance Affordability Act that FEMA should
strive to accomplish this policy, and the Cassidy-Gillibrand
legislation strengthens that language. Congress should consider
this policy as a way to easily address affordability
Maintaining Current Rate Structure--Proposals to increase
the floor of rate increases from 5 percent to 10 percent or up
should be avoided. According to FEMA, beginning April 1, 2017,
premiums are increasing an average of 6.3 percent. Increasing
the floor rate of increases to 10 percent or higher would
represent a substantial premium increase on homeowners
Preserving grandfathering--Preserving grandfathering is of
critical importance. Meaning, if you built your house to
according to FEMA's base flood elevation at the time of
construction, you will not be penalized when new maps are
introduced. The confluence of removing grandfathering and the
introduction of new maps are what drove skyrocketing rates post
Biggert-Waters, which was unfair to homeowners who built as
they should. Congress must maintain grandfathering permanently.
The Cassidy-Gillibrand legislation maintains this provision
Addressing the NFIP's debt--Congress should consider
forgiving the NFIP's debt, which currently stands at $24.6
billion, at least the portion related to the Federal levee
failures following Hurricane Katrina. At a minimum, Congress
should stop the requirement of FEMA to pay interest on this
debt, which next year will cost $400M.That $400M could be used
to build reserves or provide greater funding for mitigation. To
require the NFIP to pay this debt back to the U.S. Treasury is
robbing Peter to pay Paul
The Cassidy-Gillibrand legislation also includes some additional
affordability proposals, including vouchers for low to moderate income
Americans that are worthy of consideration.
Program Participation
Sustainability and affordability of flood insurance coverage is a
growing concern as NFIP is experiencing a year-over-year decline in
several key metrics. According to FEMA data, NFIP policies-in-force
peaked in 2009 at 5,700,235. As of June 30, 2016, the number of
policies-in-force was 5,083,071, a decline of almost 11 percent from
2009. Total coverage-in-force is also in decline after peaking at
approximately $1.3 trillion in 2013 and as of June 30, 2016, is
approximately $1.25 trillion. For only the second time since 1978,
total premium earned has fallen from the previous year, with $3.54
billion of premium earned in 2014 compared to $3.44 billion in 2015.
This is not sufficient evidence to validate a long-term forecast of
year-over-year decline for NFIP, but policymakers must be mindful of
data showing declines in core program variables over the short-term. It
must also be noted that key coverage-in-force and premium earned
declines have largely occurred post-Biggert-Waters Act.
For policymakers to more fully achieve the core purposes of
national flood insurance--floodplain management, limiting Government
disaster costs, and facilitating property owner purchase of insurance--
the NFIP must be designed with the interests of end users as
preeminent. Increases in both policies written and coverage in force
will bring greater stability to communities and provide greater
protection for the Federal treasury. Simply put, with both the severity
and frequency of floods increasing, we need more people buying flood
insurance.
Policies to increase program participation include:
Offering a default ``opt-out'' flood policy as standard
part of homeowners insurance package--NFIP should be directed
to engage in product testing that offers consumers a
``default'' insurance option where consumers are required to
actively decline (opt-out) flood insurance coverage. Based on
the outcome of consumer testing, NFIP and NAIC should move to
expand ``default'' options that include NFIP coverage as
appropriate
Expanding the definition of the Special Flood Hazard Area--
Congress should authorize a study to assess the effectiveness
of the mandatory purchase requirement; assess the benefit of
mandatory purchase to taxpayers, communities, and households;
and identify areas outside designated SFHAs or adjacent thereto
where mandatory purchase would have a demonstrable, positive
cost-benefit impact for taxpayers and property owners
Mandatory purchase of flood insurance for properties that
have experienced a loss and Federal disaster assistance was
accepted to repair or replace the structure--Congress should
consider requiring mandatory purchase of flood insurance for at
least ten years for properties that have experienced a flood
loss event and Federal disaster assistance was accepted to
repair or replace the damaged structure and contents. The
mandatory purchase requirement should attach to the structure
and the requirement should be noted in local land records in a
manner that is readily apparent to title researchers, lenders,
appraisers, borrowers, and other parties interested in the
transfer of property
The Role of the Private Market
Another concept being widely discussed as we move towards
reauthorization is the role of the private market. While a fuller entry
of the private market would bring needed competition and discipline to
the flood insurance market, I urge Congress to be mindful of the risk
of cherry-picking. A scenario where the private market comes in and
takes all of the low risk properties while leaving the NFIP with
nothing but high risk properties will not serve the policy holder well
and leaves the NFIP open to needing further loans from the U.S.
Treasury. An increase in private market coverage should occur parallel
to a healthy and sustainable NFIP.
The Cassidy-Gillibrand legislation includes policy solutions to
ease private market reentry in a responsible way, and those proposals
should be included in reauthorization. One policy related to the
private market that must be included in reauthorization is:
Including continuous coverage language in reauthorization--
Language should be included in reauthorization that allows
policyholders to maintain continuous coverage, which would
allow them to leave the NFIP for the private market and
subsequently return to the NFIP while proving continuous
coverage, and thus maintain a grandfathered rate. This policy
is key to providing consumers with the assurance needed that
the NFIP will be available should they be priced out of the
private market or should private flood insurance become
unavailable. Under current law, policy holders who may have
access to more affordable, comprehensive private market
coverage are not incentivized to leave the NFIP.
Multiyear Reauthorization
It is critically important that we reauthorize the NFIP for a
multiyear period. Short-term extensions, and especially lapses in
authorization, have real world implications. Lapses in authorization
stall or kill home closings. Particularly with a September 30
expiration--in the middle of hurricane season--American home and
business owners need to be able to rest assured that the flood
insurance they have purchased and relied on will be available should a
flood happen. A multiyear reauthorization is needed to bring certainty
to consumers and real estate markets.
Again, thank you for the opportunity to speak to you today about
the reauthorizing and reforming the National Flood Insurance Program,
and for your service. CSFI stands ready and willing to assist the
Committee as we work to reauthorize the NFIP by September 30.
______
PREPARED STATEMENT OF LARRY LARSON
Director Emeritus, Association of State Floodplain Managers, Inc.
May 4, 2017
Introduction
The Association of State Floodplain Managers is pleased to
participate in this hearing about the reauthorization of the National
Flood Insurance Program (NFIP). We appreciate the opportunity to
discuss our views and recommendations for the future of the program. We
thank you, Chairman Crapo, Ranking Member Brown, and Members of the
Committee for your interest in this important subject.
The ASFPM and its 36 chapters represent more than 17,000 local and
State officials as well as other professionals engaged in all aspects
of floodplain management and flood hazard mitigation including
management of local floodplain ordinances, flood risk mapping,
engineering, planning, community development, hydrology, forecasting,
emergency response, water resources development, and flood insurance.
All ASFPM members are concerned with reducing our Nation's flood-
related losses. For more information on the association, its 14 policy
committees and 36 State chapters, our website is: www.floods.org.
Floods are this Nation's most frequent and costly natural disasters
and the trends are worsening. The NFIP is the Nation's most widely used
tool to reduce flood risk through an innovative and unique mix of
incentives, requirements, codes, hazard mitigation, mapping, and
insurance. At the same time, we understand the four main pillars of the
NFIP are interconnected; and making significant changes to one pillar
without thoughtful consideration of the other three can erode the
program overall. While we are under no illusion that the NFIP is the
only tool in the toolbox, it is one that serves 22,000 communities,
policyholders, taxpayers, and the public well. ASFPM's testimony is
intended to provide a better description of these interdependencies as
well as 24 recommendations for Congress to consider to reform the NFIP.
The NFIP Is a National Comprehensive Flood Risk Reduction Program
The NFIP was created by statute in 1968 to accomplish several
objectives. Among other things, the NFIP was created to:
Provide for the expeditious identification of and
dissemination of information concerning flood-prone areas
Require States and communities, as a condition of future
Federal financial assistance, to participate in the NFIP and to
adopt adequate floodplain ordinances consistent with Federal
flood loss reduction standards
Require the purchase of flood insurance by property owners
who are being assisted by Federal programs or by federally
supervised, regulated, or insured agencies in special flood
hazard areas
Encourage State and local governments to make appropriate
land use adjustments to constrict the development of land
exposed to flood damage so homes and businesses are safer and
to minimize damage caused by flood losses
Guide the development of proposed future construction,
where practicable, away from high risk locations threatened by
flood hazards
Authorize nationwide flood insurance program through the
cooperative efforts of the Federal Government and private
insurance industry
Provide flexibility in the program so flood insurance may
be based on workable methods of distributing burdens equitably
among those protected by flood insurance and the general public
who benefit from lower disaster costs
Beyond merely providing flood insurance, the NFIP is unique as it
integrates multiple approaches to identify flood risk, communication of
the risk, and reduction of flood losses. It is a unique collaborative
partnership enlisting participation at the State and local level. It is
a multifaceted, multiple objective program--a four legged stool as it
is often called. The four legs of the stool are (1) floodplain mapping,
(2) flood standards, (3) flood hazard mitigation, and (4) flood
insurance. Altering one leg without careful consideration of impacts on
the other three legs can have serious repercussions on reducing flood
losses. NFIP on the whole provides substantial public benefits as our
testimony will further detail.
A Pivotal Time for the NFIP--Current Status
At the end of 2016 the NFIP, which is 50 years old, had paid $56.4
billion in claims. But beyond paying insurance claims, the NFIP has
also mapped 1.2 million miles of streams, rivers and coastlines. It has
invested more than $1.3 billion in flood hazard mitigation for older,
at-risk structures. Because of the program, over 22,000 communities
adopted local flood risk reduction standards, which results in nearly
$2 billion of flood losses reduced annually. The NFIP has provided
innumerable public benefits as well as direct monetary ones to
taxpayers.
At the same time, based on historical flooding and dealing with
ongoing development, future conditions are and will continue to change,
perhaps quite significantly. While floodplain managers know upstream
development often results in increased flood heights, we also observe
changing weather patterns that result in shifting snowmelt/rainfall in
the West. Nationally, more intense short duration storms are causing
more flash floods, and unrelenting sea level rise (SLR) is beginning to
affect communities from Florida to Virginia to Alaska. A recent NOAA
report added a new upper boundary for SLR this century up to 2.5m (8
feet) by 2100 due to new data on the melting of the Greenland and
Antarctic ice sheets. This new data is getting the attention of our
State and community members. For example, a recent article shows Rhode
Island State officials discussing how to deal with these new scenarios.
Luckily the NFIP, as it exists today, can help States and communities
address these problems with its innovative mix of incentives,
requirements, data, and tools.
Still, improvements can be made. NFIP reform legislation in 1994
and 2004, in addition to other measures, outlined reforms focused on
reducing repetitive loss properties. Today those remain problematic.
Reform legislation in 2012 focused on flood mapping. Today the National
Flood Mapping Program provides important authorities for FEMA and
cooperating technical partners to map all flood hazard areas across the
country. Reform legislation in 2004, 2012, and 2014 addressed
deficiencies in the insurance element of the NFIP. There is still more
work to be done. It is important to note that the 2012 and 2014 reform
legislation resulted in 80 new sections of law that are not yet fully
implemented. ASFPM hopes Congress will be thoughtful about reforms that
might be considered in 2017 as we do not yet fully know the program
outcomes that will result from the previous two reform bills.
So what will the NFIP of tomorrow look like? ASFPM believes the
Nation will continue to need a robust, fiscally strong NFIP to
comprehensively reduce flood risk. We also believe a strong NFIP can
co-exist with a developing private market. But at the end of the day we
must acknowledge that at least today's NFIP is far more than an
insurance program. It is the Nation's primary tool to identify and map
flood hazard areas used by a multitude of agencies. The program is also
a tool to assess flood risk, used to work with communities and States
to implement strong land use and building standards to prevent future
disaster losses, and works with property owners and communities to
undertake mitigation to reduce damage to older at-risk buildings, in
addition to providing flood insurance. While we have witnessed several
narrowly focused reform proposals since the convening of the 115th
Congress, we are particularly encouraged by the recent release of the
bipartisan Cassidy-Gillibrand discussion draft which is a comprehensive
reform bill with several good ideas. We look forward to working with
the committee on comprehensive NFIP reform bill that serves
policyholders, communities, and taxpayers.
A Long-Term Sound Financial Framework Is Needed
The NFIP had generally been self-supporting until 2005. In the
1980s the program went into debt a few times and ultimately Congress
forgave approximately $2 billion. But from the mid-1980s to 2005, the
NFIP was largely self-sustaining and when borrowing from the U.S.
Treasury, the debt was repaid with interest. However, due to
catastrophic floods in 2004, 2005, and 2012, and now due to a high
claims year in 2016, the program does currently owe $24.6 billion to
the treasury. Unfortunately, we heard this past March in testimony to
the House from FEMA, that this past January, the program had to even
borrow to pay the interest on the debt (and today's debt is financed at
historically low rates). This was done only one other time back in 2008
after Hurricane Ike. When interest rates eventually cycle back to more
historic levels, the interest on the debt payments will destabilize the
program.
The NFIP was never designed to pay for catastrophic events. In
fact, from 1968 to 1978 the concept was one of risk sharing with the
private sector with the program actually paying a subsidy to private
insurers for pre-FIRM structures. As recently as the late 1980s,
internal communications show that the Administration reaffirmed the
Federal treasury was essentially the reinsurer of last resort. \1\ It
seems this history has been forgotten. Further, the NFIP is being held
to a much different standard than another disaster loss management
program that Congress annually subsidizes, the Federal crop insurance
program. How can it be that a program like crop insurance, with a
primary purpose is to encourage insurance as an alternative to ad hoc
disaster spending, be annually subsidized at $6.5 billion annually, \2\
with strong Congressional support?
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\1\ Dr. Len Shabman with Resources for the Future has been
researching this topic in-depth and will be soon developing a paper
detailing the history and specifically the financial arrangement of the
NFIP from 1968-1978 as well as the strengths and weaknesses of the
public-private loss sharing model that actually still exists today.
\2\ According to the Congressional Budget Office, the Federal
outlays for crop insurance is expected to average $8.8 billion per year
from FY2015-FY2024 based on the 2014 farm bill changes. It is also
interesting to note that the Federal Government subsidizes
approximately 62 percent of the crop insurance premium; that the
subsidy was expressly increased to stimulate participation in the crop
insurance program in order to avoid disaster assistance; and that
premium subsidies, administration and operating expenses, and
underwriting losses/gains are considered mandatory spending in the
Federal budget. (Congressional Research Service: Proposals to Reduce
Premium Subsidies for Federal Crop Insurance, 2015.)
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Important progress toward putting the program on a more sound
financial footing was made as part of the past two NFIP reforms in 2012
and 2014, which ASFPM supported. Under BW-12, reforms (later modified
by HFIAA-14) were made to the rate structure to move subsidized
policies to actuarial premium rates, to allow the NFIP to purchase
reinsurance and to establish a reserve fund. All of these help reduce
the financial risk to the program and ultimately to the American
taxpayer.
But what has been very frustrating to ASFPM is Congress'
unwillingness to address the program debt and any long term framework
of stability should a truly catastrophic event happen again (such as
another Katrina). After reviewing FEMA's interest and principle
payments after 2005 and based on FEMA's analysis of cash flow, if
Congress had promptly dealt with the debt amassed from the 2004-2005
hurricane seasons, then the NFIP wouldn't have had to borrow from the
treasury to pay Hurricane Sandy claims and would have likely not had to
borrow for claims in 2016. Those pointing to today's debt in the NFIP
as evidence that the NFIP is irreparably broken do not understand that
if the 2004-2005 debt had been resolved in a timely manner by Congress
(as had been done in the 1980s and consistent with the program's
design), the NFIP would be functioning well with little or no debt
today.
ASFPM recommends Congress forgive the current NFIP debt
Congress should also develop a threshold above which the
Federal Government will backstop claims resulting from
catastrophic events for the NFIP based on an evaluation of the
program's current financial capacity and level of risk transfer
to the private sector given the financial risk management tools
Congress has asked FEMA to implement
Floodplain Mapping
Floodplain mapping is the foundation of all flood risk reduction
efforts, including design and location of transportation and other
infrastructure essential to support businesses and the Nation's
economy. Today FEMA has in place right policies and procedures (i.e.,
requiring high-resolution topography (LIDAR) for all flood map
updates), and is using the best available technology to produce very
good flood studies. For example, FEMA is doing some pilot studies in
Minnesota and South Dakota using very precise topographic mapping and
automated flood study methods to develop base level engineering that
can be used as an input into future flood studies. This gives
communities data immediately to use for planning and development rather
than waiting years for the data. In coastal studies, FEMA now uses the
state-of-the-art ADvanced CIRCulation (ADCIRC) model for storm surge
analysis. Unfortunately, due to the length of time it takes from
initiation of a flood study to final production, some maps coming out
today may have been started a decade ago and are not being produced to
today's specifications. It is important to distinguish between these
legacy mapping projects and those meeting today's guidance and
specifications. ASFPM is also pleased that FEMA has prioritized
eliminating remaining pure ``paper'' maps that have never been
modernized with newer flood study procedures.
Recently there has been confusion around whether or not
sophisticated risk assessment modeling developed by the private sector
can be a suitable replacement for FEMA flood maps and data. However,
this is comparing apples to oranges. First, FEMA flood maps and data
are already produced by the private sector (under contract to FEMA).
Second, the private sector risk assessment methods largely developed to
assist the reinsurance industry are not publicly available. Those
models do not produce a ``map'' the community can use for multiple
purposes and cannot inform the other needs of the program including
hazard mitigation and floodplain management. Such methods can
complement FEMA maps for the purposes of rating flood insurance, but do
not replace FEMA maps. Further, those developing such models have
indicated they depend on FEMA maps to calibrate their models.
Today, flood risk maps only exist for about \1/3\ of the Nation--
only 1.2 million of 3.5 million miles of streams, rivers and coastlines
have been mapped. Even today some of the maps are many decades old, or
were updated before the current standards to redraw boundaries based on
more accurate study data and topography. Many areas have never been
mapped, so there is no identification of areas at risk. The development
occurs with no flood standards. This is what is happening in thousands
of subdivisions across the country: areas are developing into tens of
thousands of housing units that use to be cornfields and cow pastures.
Later, after there is significant development at risk and often after a
flood or two, FEMA comes in and maps it. Then the dynamic changes and
everything becomes adversarial. People think FEMA put a floodplain on
them when it was there all along. The property owner is mad because
they have to buy flood insurance at high premiums because flood
elevations were unknown. Realtors are upset because it is a surprise
and may have an impact on the future salability of homes. And local
elected officials fight to minimize the size of the mapped floodplain,
spending thousands of dollars on competing flood studies that are often
minimal changes.
The point is it doesn't have to be like this, but we have to start
changing our mapping priorities. The entire dynamic can change if maps
showing risk are available before development starts. We must map
today's corn fields and cow pastures to get mapping ahead of
development.
The National Flood Mapping Program (NFMP) authorized by Congress in
2012 Reform Act was one of the most important elements of the
legislation and is the right approach. While FEMA has not made much
progress on mapping residual risk areas, failure inundation areas or
areas of future development, FEMA is making progress, paying attention
to recommendations made by the Technical Mapping Advisory Council. Now
we need 2.3 million miles of unidentified flood hazard areas, and
maintain the existing inventory of 1.2 million miles of flood studies.
ASFPM supports Section 501 of the Cassidy-Gillibrand bill to increase
the authorization for flood mapping to $500 million annually.
Another key issue is mapping areas below dams and behind levees to
show the residual risk areas that will be flooded when the dam or levee
overtops, fails or a spillway is used. This was an issue with the
recent flooding below Oroville Dam in California. While local emergency
management officials had access to these maps, two hundred thousand
evacuated property owners did not. People need to know they are living
or buying in a residual risk area so they can take preparedness and
mitigation measures such as buying a low cost flood insurance policy.
In just the last 2 years, South Carolina alone has had 80 dam failures
due to increasingly intense flooding events. Unfortunately, DHS policy
has continued unchanged since 9/11 which is that inundation maps for
Federal dams and levees are classified as For Official Use Only and not
publicly available. This means citizens living there do not know they
are at risk until law enforcement knocks on their door in the middle of
the night and orders them to evacuate.
In recent years, a Federal Policy Fee associated with NFIP policies
($50 for high-risk policies; $25 for lower-risk policies) has paid
between 30-60 percent of the flood mapping program and appropriations
paid for the remainder. The highest level of appropriations in the past
5 years has fallen far short of the $400 million per year authorized in
BW-12. So funding from the Federal Policy Fee is an important part of
the funding for map updates and corrections. Fewer NFIP policies means
less funding for updated maps.
ASFPM recommends the reauthorization of the National Flood
Mapping Program (NFMP)
ASPFM supports an increased authorization for the National
Flood Mapping Program to accelerate the completion of the job
of initially mapping the Nation in 5 years and getting to a
steady-state maintenance phase
ASFPM recommends that Congress require Federal dam and
levee inundation maps be publicly available and cease their
classification as For Official Use Only
Finally, ASFPM would like to comment on the Cooperating Technical
Partners (CTP) program. The CTP program. The CTP program is an
innovative approach to creating partnerships between the Federal
Emergency Management Agency (FEMA) and participating NFIP communities,
regional agencies, State agencies, tribes and universities that have
the interest in becoming more active participants in the FEMA flood
hazard mapping program. Just this past Monday, at the ASFPM annual
conference, FEMA presented its first annual CTP award to the San
Antonio River Authority (SARA). SARA, a CTP since 2003, manages its own
floodplain mapping projects for watersheds in the San Antonio River
Basin, and also processes its letter of may revisions. By incorporating
its local knowledge and data into the flood mapping process, FEMA
maximizes its leveraging of local knowledge and data, and the community
produces more acceptable mapping products for its citizens. In short,
it is huge benefit for both FEMA and SARA. ASFPM strongly supports the
continuation and expansion of the CTP program. ASFPM is concerned that
the CTP program is focusing on communities that are already capable
versus helping those communities which need assistance building mapping
capabilities.
Floodplain Regulations, Standards, and Codes
More than 22,200 communities participate in the NFIP, which
basically means they have adopted minimum development and construction
standards to reduce flood losses. As floodplain areas are identified
and mapped throughout the Nation, NFIP participating communities must
adopt and enforce local floodplain management standards that apply to
all development in such areas. In urban and rural areas alike, these
standards have for decades set a minimum level of protection for
development occurring in identified floodplains.
States are required to apply similar standards for State funded,
financed and undertaken developments. In fact, NFIP standards are the
most widely adopted development/construction standards in the Nation as
compared to building codes, subdivision standards or zoning. FEMA has
estimated that for approximately 6,000 of the NFIP participating
communities, the only local codes they have adopted are their
floodplain management standards. Today it is estimated nearly $2
billion of flood losses are avoided annually because of the adoption
and implementation of minimum floodplain management standards. Often
communities decide to adopt standards that exceed the Federal minimums.
For example, over 60 percent of the population in the United States
lives in a community that has adopted a freeboard--which is an
elevation that is higher than the base flood (or 100-year flood) where
buildings must be elevated. A freeboard not only has the benefit of
making the construction safer, but it can have a tremendous impact on
flood-insurance rates. A freeboard of 3 feet can reduce premiums by
more than 70 percent.
In 2016, ASFPM participated in an agricultural floodplain ordinance
task force which was formed to identify and develop refinements of the
NFIP in agricultural and leveed agricultural areas. ASFPM's Chair Ceil
Strauss, the State floodplain manager for Minnesota participated in
this group, and was supported by floodplain managers from several
States where agriculture is a significant element of the economy. While
ASFPM supported several recommendations of that task force, including
FEMA's update of Technical Bulletin 7-93, ASFPM urged caution to
broader considerations to change NFIP standards to exempt certain
classes of activities from needing floodplain development permits or
needing to elevate certain agriculturally related structures. One only
needs to remember the carnage of Hurricane Floyd in North Carolina in
1999 where over $2 billion in agricultural losses occurred including
the loss of 30,000 hogs, 700,000 turkeys and 2.4 million chickens. If
anything, NFIP minimum standards need strengthened to address modern
agricultural methods including large concentrated animal feeding
operations (CAFOs).
Why do communities participate in the NFIP and adopt local
standards? State floodplain managers around the Nation who have
enrolled nearly all of the communities in the past 40 years know a
major reason is to make flood insurance available to their citizens. If
a community hasn't joined (there are still about 2,000 communities not
in the NFIP), it is usually compelled to do so when a resident gets a
federally backed mortgage and needs to have flood insurance. While
there are some nonparticipation disincentives in terms of restrictions
on some forms of disaster assistance, such disincentives are weak and
very limited. For most communities, they are not much of a disincentive
at all, but getting flood insurance is.
The entire floodplain management budget (100 percent), which
includes staffing, community and State technical assistance, and the
Community Assistance Program (CAP-SSSE), comes out of the Federal
Policy Fee.
ASFPM recommends almost all forms of disaster assistance
(especially public assistance) be tied to a community's
participation on the NFIP
Flood Hazard Mitigation
NFIP has two built in flood mitigation programs: Increased Cost of
Compliance (ICC) and Flood Mitigation Assistance (FMA). These NFIP
funded mitigation programs have resulted in more than $1.3 billion in
funds to reduce risk to thousands of at-risk, existing structures. The
Multi-Hazard Mitigation Council in its research of FEMA flood hazard
mitigation projects determined that such projects resulted in $5 in
benefits for each $1 spent. ICC and FMA have mitigated, on average,
1,850 buildings annually between 2010 and 2014. ASFPM strongly supports
both programs.
ICC is the fastest way to get flood mitigation done and is paid for
100 percent through a separate policy surcharge. Since it isn't run
like a typical grant, funds are available much quicker. It is a
transaction between the insured and insurance company. Sixty percent of
ICC claims are used to elevate a building and 31 percent of the time
it's used to demolish a building. Other techniques used are
floodproofing or relocation of the building out of the floodplain
altogether. From 1997 to 2014, ICC has been used to mitigate over
30,000 properties.
ASFPM has been frustrated for several years over the pace of FEMA's
implementation of its existing authority to make ICC much more useful.
In 2004 ASPFM worked with Congress to add triggers to ICC, so now there
are four of them:
A building being substantial damaged,
A building classified as a repetitive loss,
A building where an offer of mitigation is being made, and
The administrator's discretion to offer ICC when it is in
the best interest of the flood insurance fund.
Of these four, only one trigger is being utilized--when a structure
has been determined to be substantially damaged. While FEMA will claim
it also applies ICC to repetitive loss properties it, is only that
subset of them that have also been substantially damaged. The point is
that there are three triggers--in existing law--that could be used in a
pre-disaster sense. ASFPM would note that this past fall, FEMA has
finally convened an internal working group to look at ICC and evaluate
how to make it more effective. ASFPM urges the committee to monitor the
progress of this group to ensure that the congressional intent has been
carried out.
Another frustration with how ICC is currently being implemented is
the determination of how the surcharge is set by FEMA's actuaries.
Currently funding for ICC is through a congressionally mandated
surcharge capped at $75 per policy. The latest data ASFPM has is for
calendar year 2014 where ICC brought in approximately $74 million for
mitigation. On average this equals about $15 per NFIP policy--which is
far below the statutory cap. However, as ASFPM has been discussing
changes to ICC including increasing the ICC claim limit beyond $30,000,
a response we often get is that the FEMA would have a tough time making
the changes because it is collecting as much as it can under the
existing cap and that the surcharge rate is set using actuarial
principles.
However, in its 2010 rate review, FEMA discussed how it was
collecting more in ICC than it was spending and therefore adjusted the
amount it would collect per policy down in 2011. The result? In 2010
the surcharge collected $84.5 million and in 2011 the surcharge
collected $78.2 million. The point of this is that the rate setting
becomes a self-fulfilling prophesy--FEMA's inability to implement ICC's
other triggers result in the program not being fully used. And its low
utilization in turn led to FEMA determining that the rates should be
lowered. So it gives the appearance there is room under the existing
cap. ASFPM believes there is room under the existing cap and suggests
Congress look at setting a tiered amount that would be consistent with
the existing cap limit and reflective of risk. For example, ASFPM
calculates that under such an approach an ICC surcharge set at $25 for
BCX-Zone properties, $50 for actuarially rated A- and V-Zone properties
and $75 for subsidized A- and V-Zone properties, would generate
approximately $227 million in revenue that could be used by
policyholders to mitigate their flood risk.
ASFPM believes ICC needs two other adjustments by Congress to be
more effective. First, while ICC is collected on every policy, FEMA
believes the statute requires the ICC claim be counted toward the total
claim limit. This means a home that gets a $250,000 damage claim, the
amount available for ICC is $0. Second, the ICC claim limit is too low.
Estimates to elevate a home range from $30,000 to $150,000 with an
average closer to $60,000. While $30,000 is very helpful, it often does
not come close enough to cover enough of the mitigation cost. ASFPM is
very supportive of Section 203 in the Cassidy-Gillibrand bill that
increases the coverage limits of ICC to $75,000.
ASFPM recommends the ICC claim limit be in addition to the
maximum claim limit under a standard flood insurance policy
ASFPM recommends the ICC claim limit be raised to $60,000
or higher
ASFPM recommends Congress specifically allow FEMA to
utilize the available ICC amount for both demolition and
acquisition costs as a means of compliance, when the claim is
assigned to the community and deed restricted as open space
ASFPM recommends FEMA clarify to Congress whether or not
expanding ICC to utilize pre-disaster triggers, raising the
claim limit and allowing demolition and acquisition costs would
necessitate increasing the cap and based on that information
either raise the cap or set a tiered surcharge within the
existing cap
ASFPM recommends Congress waive any rulemaking requirements
that may be an impediment to quickly implementing the pre-
disaster triggers for ICC and allowing demolition and
acquisition costs
FMA operates like a typical grant program where a community applies
through the State through a grant application. Further, FMA also funds
other types of mitigation that can address issues on the neighborhood-
or community-scale such as stormwater management systems to reduce
flood risk and flood mitigation plans. In recent years, the priority
for the FMA program has been repetitive loss and severe repetitive loss
properties. While this is an important objective, ASFPM worries that an
exclusive focus on such projects is increasingly resulting in a gap
where no assistance is available for properties that desperately need
assistance, such as older pre-FIRM nonrepetitive loss structures for
which insurance rates may be increasing significantly. ASFPM recommends
that accommodations be made for these types of properties as well when
FEMA formulates its new policy guidance. As our testimony will go into
more detail below, one approach to flood insurance affordability is to
subsidize flood hazard mitigation or at least give property owners a
chance to mitigate. Another idea for Congress to consider is a
mitigation surge where Congress would supplement FMA funds with a large
one-time or multiyear appropriation to either address the growing
number of repetitive loss properties, or specifically address pre-FIRM
properties where affordability of flood insurance has become untenable.
Repetitive loss claims continue to drain the National Flood
Insurance Fund and today, there are at least 160,000 repetitive loss
properties. Hazard mitigation efforts have been insufficient to reduce
flood damage to older structures and ultimately reduce the overall
number repetitive loss properties. Current mitigation programs within
the NFIP are underfunded and not reducing the overall number of
repetitive losses in the country.
Flood Insurance
Flood insurance is the easiest way for a property owner to manage
their flood risk. It was also viewed by the original authors of the
program as a way to more equitably share risks and costs of development
decisions. Yet too few property owners and renters carry flood
insurance. Today it is estimated 10 percent of the population lives in
an identified floodplain and that number is projected to grow to 15
percent by the year 2100 based on natural population growth and future
conditions (land use, development, and climate change). It is also
estimated the number of policies increasing by 100 percent and the
average loss per policy increasing by 90 percent in 2100. \3\ The point
is that these trends show growth in the human occupation of flood
hazard areas and the potential damage that may result. As we have
pointed out earlier, there are many more miles of rivers, streams and
coastlines that aren't even yet mapped (which is why it is unsurprising
that 20 percent of NFIP claims and \1/3\ of Federal disaster assistance
come from outside of mapped floodplains). \4\
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\3\ ``The Impact of Climate Change and Population Growth on the
National Flood Insurance Program through 2100''. 2013.
\4\ ``FloodSmart Flood Facts''. Webpage accessed 3/14/17.
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The Push for Expansion of a Private Flood Insurance Market
In 2012 and today, there appears to be much interest in expanding
the private flood insurance market. Many believe the private sector is
a cure-all and can get the taxpayer off the hook for flood losses. And
there seems to be a belief that if not for Congressional intervention
in 2017, a robust private market would develop. ASFPM believes that the
private sector can be a partner to the NFIP in growing the policy base
nationally, but any reforms to the law to do so should be done with
care. For example, ASFPM rejects the notion that the NFIP should be a
program of ``last resort'' only insuring the worst risks, and strongly
urges Congress to consider reforms that do not lead to cherry-picking
of the risks that maximize the private industry's profits--to the
detriment of the NFIP. ASFPM has the following observations related to
expanding the private flood insurance market. First, private flood
insurance has always been part and will continue to be allowed under
the NFIP. Currently, robust private markets exist for policies in
excess of NFIP limits. The private market has almost all of the
commercial and industrial flood risk in the country. And robust private
markets exist for forced place properties. Too often in 2012 and again
this year, conversations in Congress about private flood insurance
imply private companies are not currently writing policies. Not true!
Both industry leaders and even testimony by the CEO of the Nation's
largest private flood insurance agency to the House in March indicated
very strong growth, especially over the past 2 years.
Second, the reforms to stimulate more private market participation
in 2012 have worked as intended. ASFPM strongly disagrees with those
who believe that somehow the 2012 reforms were badly written or somehow
missed its intent. ASFPM has spoken with numerous industry sources, as
well as had extensive conversations with private sector companies
interested in offering private flood insurance and former State
insurance commissioners. This industry is growing and in the past 2
years has expanded significantly. For example, private flood policies
today are required to contain a flood mitigation coverage that is
similar to ICC because the 2012 reforms required that private policies
have coverage ``at least as broad as'' NFIP policies. This ensures that
property owners have funds to elevate flood prone homes and that
communities are not faced with owners who just walk away from the
property because it is too expensive to elevate. The 2012 reforms are
ensuring that the private market is growing in an orderly way with
appropriate safeguards that ensure protections for policyholders,
lenders, taxpayers, and communities.
Current law requires private policies to include six key
provisions: coverage that is at least as broad as coverage under a
standard flood insurance policy under the NFIP including deductibles,
exclusions, and conditions; a notice of cancellation requirement;
information about availability of flood insurance coverage under the
NFIP; a mortgage interest clause similar to that found in a NFIP
policy; a time limitation for filing a lawsuit after a denial of a
claim; and cancellation provisions as restrictive as those under a NFIP
policy. ASFPM has significant concerns from both a policyholder and
community perspective about recent legislative proposals to eliminate
these provisions, especially the two that pertain coverage/exclusion
requirements and the mortgage interest clause requirements. To offer a
policy for half the NFIP price might sound good but if the coverage is
only 25 percent of the NFIP policy or if the deductible is beyond the
ability of the property owner to pay it is a very bad deal (as the
consumer will find out when a flood hits). Taxpayer costs of disaster
relief will also explode if weak coverage is allowed in the private
market. ASFPM urges that these six provisions be retained in any
comprehensive NFIP reform legislation.
As a result of the successful 2012 reforms to stimulate the
private flood insurance market, ASFPM does not believe any
further stimulation of the private market is needed at this
time \5\
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\5\ Last year ASFPM testified before the Senate Committee on Small
Business and Entrepreneurship on flood insurance rate increases which
also included detailed thoughts on H.R. 2901, which can be found here
or on ASFPM's website at www.floods.org.
If Congress does consider additional changes to stimulate
the private market, ASFPM urges that the six requirements for
private flood policies be retained. If these provisions are
retained to ensure that a private policy is at least equivalent
to that of an NFIP policy, ASFPM supports legislative proposals
to ensure seamless continuous coverage between private policies
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and NFIP
Third, ASFPM strongly believes a strong NFIP can coexist with the
private market offering flood insurance as long as both are on equal
playing fields. In other words, neither the NFIP nor the private market
should be at a competitive disadvantage. As explained earlier in this
testimony, private insurers depend on NFIP maps and agrees local
floodplain regulations help all insurance, yet private policies do not
have to include the Federal Policy Fee to help pay a share of these
costs. The wholly unfair PAYGO surcharge has allowed private policies
to be written using FEMA rate tables and the private sector is
profiting on the difference between the loaded NFIP policy (with
surcharges and fees) and private sector policy that does not have to
charge such fees.
Fourth, ASFPM believes that to preserve the many public benefits of
the NFIP, to ensure fairness and to prevent erosion the NFIP, two
changes must be made to the existing law to ensure private flood
policies are paying their fair share of floodplain management and
mapping costs, and to ensure that communities continue to participate
in the NFIP.
The private insurance industry uses FEMA flood maps in various
ways: sometimes to calibrate their risk assessment models, and
sometimes to determine basic eligibility of their private flood
insurance product. Industry officials ASFPM talks with all support the
floodplain management efforts in a community that provide a meaningful
program of risk reduction. Given that 100 percent of the Federal Policy
Fee goes to mapping and floodplain management, it is only equitable
that private policies help pay for these functions and that they are
not just borne by policyholders. ASFPM strongly supports Section 404 of
the Cassidy-Gillibrand bill that would assess a surcharge or user fee
on private flood policies to pay for mapping and floodplain management
and for ICC, especially if provisions of current law that require
private policies to have comparable coverages are eliminated.
ASFPM recommends an equivalency fee, equal to the Federal
Policy Fee, be assessed on private flood insurance policies and
remitted to the NFIP, and that fee be specifically dedicated
for flood mapping and floodplain management
The equivalency fee is not unlike TSA security fee which helps fund
TSA's airport security measures. For the traveling public, this fee
supports critical security measures and ensures the safety of the
commercial airline industry. And while from a purely philosophical
standpoint one could argue that the Federal Government should pay this
through appropriations, it does not. And as members of the flying
public, we certainly do not object to paying such a fee to keep us
safe. Similarly, some might argue that that floodplain management and
floodplain mapping should be wholly supported by Federal appropriations
as flood maps and floodplain management are public benefits. But for
decades this has not been the case and that burden has been shared
between the taxpayer at large and those with NFIP policies. And the
simple fact is that private flood policies and those companies selling
private flood policies, for a variety of reasons, need accurate flood
maps and depend on having local flood codes adopted and enforced. It is
entirely unfair that taxpayers and NFIP policy holders today are
subsidizing private policies which is what is happening now in absence
of such a fee. \6\
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\6\ It should be noted that in testimony before the House, Evan
Hecht, CEO of the Nation's largest provider of private flood policies
thought that such an equivalency fee was fair and was supportive of it.
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As private flood insurance becomes more widely and easily
available, provisions must be made to ensure such policies can only be
made available to meet the mandatory purchase requirement if the
community participates in the NFIP. Why? For thousands of communities
in the NFIP, the primary reason for joining the program is the
availability of flood insurance to meet the mandatory purchase
requirement. As a requirement of joining, communities agree to adopt
and enforce local floodplain management standards. As a result,
floodplain management standards are the most widely adopted in the
United States--exceeding the coverage of building codes, subdivision
regulations and zoning. The adoption and enforcement of these codes, in
turn, reduces future flood risk to the individual, businesses,
communities and taxpayers. ASFPM members understand that once you
remove the incentive for joining (flood insurance availability)
thousands of communities may rescind their codes, drop out of the NFIP,
and rely on the private policies to meet needs of property owners
without the administrative burden of adopting and enforcing local
codes. Particularly susceptible to this are small communities with low
policy counts. As stated earlier in this testimony, most communities in
the Nation already participate in the NFIP. And while the private
industry is still emerging, let's be partners in persuading communities
to comprehensively reduce flood losses. Finally, this fee has no cost
to the private insurance industry.
ASFPM recommends that private flood insurance policies
meeting the mandatory purchase requirement and can only be sold
in NFIP participating communities
As stated earlier, ASFPM is concerned about private industry
cherry-picking the best risks from the NFIP leaving the portfolio of
the program more adversely selected. Because of this concern and the
growth that is occurring in the private flood market which could lead
to such a state for NFIP, ASFPM can only support, at most, a five-year
reauthorization of the NFIP to ensure that Congress will exercise its
oversight in a reasonable period of time.
Flood Insurance Affordability
Despite the longer glide path for premium increases set in HFIAA,
rates may again reach high levels in another three or four years and a
long-term solution to affordability was not included in either BW-12 or
HFIAA. Also, to meet House PAYGO rules, there was a large surcharge
imposed on nonprimary residences, small businesses and other
nonresidential structures. The surcharge is neither risk-based nor
need-based. Premium increases and surcharges have led to a notable
reduction in policies in force, declining from a high of 5.5 million to
about 5.1 million today.
On one hand ASFPM supports pricing flood insurance premiums to
accurately reflect risk. Premiums reflecting risk inform individuals as
to the level of hazard in flood prone areas and encourage investment in
flood mitigation measures. On the other hand, many low and middle
income homeowners living in older homes in flood prone areas may not be
able to afford flood insurance if premiums are priced to reflect risk.
ASFPM believes that it is imperative that issues of affordability be
addressed, but not necessarily by only subsidizing premiums. The
University of Pennsylvania Wharton Risk Management and Decision Process
Center has developed a conceptual approach that would pair a needs
based voucher program with implementation of a low interest mitigation
loan program. ASFPM supports approaches like this that emphasize
mitigation as part of the solution. We recognize and commend the
Cassidy-Gillibrand bill for presenting a concrete proposal to address
affordability and would strongly urge the approach taken to incorporate
mitigation where it is cost effective to do so.
ASFPM notes that congressionally mandated studies on flood
insurance affordability have been completed and now look forward to
FEMA's completion of the affordability framework. However, we are also
concerned about timing of the FEMA framework relative to the
reauthorization deadline and whether any meaningful reforms will be
developed and considered.
ASFPM recommends considering a shorter multiyear
reauthorization of 2-3 years so FEMA can more fully develop
affordability recommendations for Congress to consider
ASFPM recommends the elimination of the PAYGO surcharge
established in 2014 from the standpoint of flood insurance
affordability and equity with private flood policies
ASFPM recommends that subsidies be focused on mitigation,
rather than subsidizing insurance and that any subsidy be paid
for outside of the NFIP (do not create a new cross-subsidy
rather fund through appropriations)
Mandatory Purchase Requirement and Compliance
When first enacted in 1968, the NFIP did not have a mandatory
purchase requirement. By 1973, only 200,000 property owners had flood
insurance policies. Following a series of catastrophic floods, Congress
enacted the Flood Disaster Protection Act of 1973, instituting the
mandatory purchase requirement, obligating property-owners seeking a
loan from a federally regulated lending institution to obtain flood
insurance if their assets were within a special flood hazard area. As a
result, these reforms led to a dramatic increase in insurance
penetration and by 1977, more than 1.4 million properties had flood
insurance. In short, mandatory purchase works! Even as you pass the
2017 omnibus spending bill which contains over a billion dollars in
supplemental funding for storm and flood disaster recovery, consider
that if there wasn't an NFIP and there wasn't a mandatory purchase
requirement, the supplemental appropriations you provide would be much
larger and the burden on the Federal taxpayer greater.
That is why ASFPM is concerned about some proposals circulating
that would exempt some classes of properties (such as commercial
properties) from the mandatory purchase requirement. This makes no
sense and would end up costing taxpayers more through disaster
assistance. In fact, ASFPM supports changing the mandatory purchase
requirement to include more classes of properties.
Expand the mandatory purchase requirement to include all
flood risk areas including: Erosion zones, areas behind levees
and other flood control structures, dam inundation zones, and
moderate risk areas (Zone B/shaded X)
Require flood insurance equal to the replacement cost on
any structure outside the SFHA for which two or more damage
claims or Federal disaster assistance have been paid due to
flooding unless it is mitigated
Evaluate expanding the mandatory purchase requirement for
all buildings in coastal storm surge zones
ASFPM continues to be concerned about the enforcement of the
mandatory purchase requirement. In 2014 our members became quite
concerned when FEMA decided that because mandatory purchase was not the
agency's responsibility, it rescinded the Mandatory Purchase of Flood
Insurance Guidelines (ironically our members report the document is
alive and well in circulation as a bootlegged resource and while dated,
it is still very helpful).
What is the compliance rate? Attempts to quantify this in 2005 as
part of the evaluation of the NFIP concluded that while overall the
market penetration rate of the NFIP nationwide was estimated to be
around 50 percent, the mandatory purchase requirement compliance rate
could not be precisely determined. That same study did come to the
conclusion that mandatory purchase compliance at the time of loan
origination did not seem to be an issue. \7\ While the number hasn't
been precisely determined, another study as part of the evaluation of
the NFIP contained a very good policy discussion of the mandatory
purchase issue and contained 72 recommendations, including one that
ASFPM strongly concurs with: ``FEMA should explore opportunities to
exercise a leadership role in promoting compliance and in assisting
Federal entities for lending regulation to meet their obligations
related to flood insurance.'' \8\
---------------------------------------------------------------------------
\7\ The authors did try to make an estimate of 75-80 percent;
however, stakeholders largely thought this number was high. Data
source: ``NFIP's Market Penetration Rate: Estimates and Policy
Implications''. RAND Corporation. 2006.
\8\ ``NFIP's Mandatory Purchase Requirement: Policies, Processes
and Stakeholders''. Tobin and Calfee. 2005.
---------------------------------------------------------------------------
Aside from the compliance rate, it may be useful to divide
mandatory purchase compliance into three areas: mandatory purchase
associated with loans from federally regulated lenders, mandatory
purchase associated with loans by Federal agencies that do direct
lending (i.e., Dept. of Agriculture, Veterans Administration, SBA) and
mandatory purchase associated with the receipt of some forms of
disaster assistance. It is important to note that while FEMA has the
authority to administer the NFIP, other Federal agencies typically have
the authority to administer the NFIP's mandatory purchase requirement.
Although ASFPM would note that compliance with mandatory purchase
associated with disaster assistance falls on FEMA. This means there are
likely very different processes and procedures in place.
While Congress continually raises questions about mandatory
purchase, FEMA continually points out that it does not have explicit
authority to enforce the requirement. ASFPM agrees with earlier Office
of Inspector General recommendations that FEMA could have a useful role
in the implementation of the mandatory purchase requirement including
assisting other Federal entities in addressing the compliance issue.
FEMA's Office of Inspector General in 2000 provided several examples of
how FEMA could promote compliance without assuming a regulatory or
enforcement role. One example is re-instituting a process FEMA used in
the 1980s and early 1990s that collected information about mortgages
and location in the SFHA from applicants seeking flood-related disaster
assistance. FEMA then matched the information with data on which
property owners carried flood insurance to determine the level of
compliance with the mandatory purchase requirement.
ASFPM recommends Congress clarify FEMA's role in mandatory
purchase to provide leadership and give FEMA explicit authority
to provide technical assistance to Federal entities to meet
their obligations to related to mandatory purchase compliance
ASFPM recommends the committee hold a hearing dedicated to
compliance with the mandatory purchase requirement (including
when flood insurance purchase is required as a condition of
disaster assistance) to further explore this issue
Improving the NFIP Policy Offerings
Community floodplain managers often hear complaints about the NFIP
centered around what is covered and what is not; and the inability to
get additional coverages like living expenses as part of a NFIP policy.
ASFPM has been impressed with FEMA's customer experience initiative
after Sandy with FEMA committing to improving the insurance product it
sells. Yet FEMA is constrained by a cumbersome rulemaking process that
can take years to complete.
ASFPM recommends Congress give FEMA the flexibility to
offer additional flood insurance policy options and make
changes to existing options without the need for extensive
rulemaking
In Conclusion
Floods are this Nation's most frequent and costly natural disasters
and the trends are worsening. The NFIP is the Nation's most widely used
tool to reduce flood risk through an innovative and unique mix of
incentives, requirements, codes, hazard mitigation, mapping, and
insurance. At the same time, we understand the four main pillars of the
NFIP are interconnected; and making significant changes to one pillar
without thoughtful consideration of the other three can erode the
program overall. While we are under no illusion that the NFIP is the
only tool in the toolbox, it is one that serves policyholders,
taxpayers, and the public well.
The Association of State Floodplain Managers appreciates this
opportunity to share our observations and recommendations with the
Committee.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM LARRY LARSON
Q.1. In South Carolina, we have zoning laws that have allowed
for the development of properties that drain directly into
other properties.
As a result, some South Carolinians have their homes or
businesses flooded over and over and over again, with the NFIP
picking up the tab every time.
Without heavy-handed mandates, how can we incentivize local
governments (municipal and county) to be proactive and rectify
these repeat problem areas to the benefit of homeowners and
taxpayers?
A.1. This is an issue that exists when local communities do not
provide adequate development standards that protect the
property rights of those adversely impacted by development as
well as those of the developers. Property rights of both are
important. No property owner has the right to do something on
their property that will adversely impact someone else's
property. Many communities require those developing to
demonstrate how any increased runoff from the development will
be retained on-site, or will otherwise be mitigated to not
adversely impact others. ASFPM has how-to guides and tool kits
on our website showing how communities can do accomplish this:
www.floods.org/index.asp?menuID=460&
firstlevelmenuID=187&siteID=1.
The NFIP currently provides community credits in ``Activity
450'' of the Community Rating System for community adoption of
Low Impact Development (LID) stormwater management practices.
These are generally modest levels of credit (of up to 25
points). Considerably higher levels of community credits are
available when communities adopt requirements for new
developments to control and provide for infiltration of water
runoff for increasingly higher volume storms. Such approaches
can make a substantial difference in reducing conflicts and
controlling worsening future flooding conditions through
thoughtfully managing the community's stormwater.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
FROM LARRY LARSON
Q.1. Affordability: As we examine reauthorizing the NFIP, we
cannot repeat the mistakes of Biggert-Waters and increase costs
that drive homeownership out of reach for working people.
Many of the fixes we passed in HFIAA--such as capping the
rate of insurance increases for most primary residences and
preserving grandfathering--were crucial to making sure
homeowners in my State, especially in areas like Minot, Fargo,
and Drayton, could afford to stay in their homes. In Minot in
particular, the city is facing a looming remapping deadline in
the fall of 2018 that will significantly alter the
affordability for nearly three thousand properties in the area.
Many properties are slated to be moved from an X (low risk)
zone to an AE (high risk) zone, which will mean a huge premium
increase for many of these homeowners. I've heard from some in
my State that the jump could be from roughly $400 per month to
$2K-$6K per month, if they don't secure flood insurance prior
to the remapping.
Minot is a great example of why grandfathering is so
critical for keeping families in their home. Do any of the
witnesses believe that the grandfathering and affordability
caps placed in HFIAA should be altered?
A.1. ASFPM warned in its testimony as Biggert-Waters was being
debated that movement towards actuarial rates too fast would
cause the problems that eventually occurred resulting in the
changes under HFIAA. ASFPM supported the adjustments in HFIAA,
which really resulted in the lengthening of time for policies
to move to full risk rates. The important element that was
preserved is a point of certainty that actuarial rates will
truly happen. These rates had been grandfathered for 44 years
until BW-12 started the move to actuarial. Three important
things must happen to make this process successful:
1. Continual movement to actuarial,
2. FEMA should show policyholders what full risk rates will
ultimately be on NFIP policies, and then show discounts
being provided, and
3. Assistance should be provided to mitigate the building so
the property owner can afford the premium--this
mitigation assistance can be through ICC or mitigation
programs like PDM or FMA, and, when available, HMGP or
CDBG-DR or other assistance grants.
An additional idea to consider is establishment of a State-
related ``mitigation'' revolving loan program working to assist
communities and homeowners with voluntary property buyouts and
relocations, or other building mitigation measures (such as
loans for elevation of building utilities) to help lower
homeowners' insurance costs through lowering flood risk to
structures.
Q.2. In order for residents to obtain the benefit of affordable
rates, they need to secure flood insurance prior to the
remapping. How can we better educate homeowners about the
critical importance of these mapping changes and the impact it
will have on affordability?
A.2. It is clear from research and analysis that citizens most
trust information from people they know; usually the local
officials. It is important to enlist local officials to help
educate the property owners on their risk and urge them to get
insurance now. Any resources to assist local officials in doing
this would be useful.
Q.3. As we see more and more extreme flooding across the
country, FEMA will always be there for homeowners on the back
end with at least some Federal money through hazard mitigation
assistance.
Given that severe flooding occurs more often, and the
Federal Government many times foots a lot of the bill
irrespective of flood insurance, does it make sense to expand
some level of mandatory flood coverage to all federally insured
mortgages?
A.3. Yes, it makes sense to expand mandatory purchase and ASFPM
has testified previously that many options exist, such as
requiring insurance on all loans in 500-year floodplain and in
residual risk areas behind or below structures that may fail or
overtop,; or all the way up to consider requiring that all
homeowner policies must cover all natural hazards, including
floods just like they cover wind and fire now.
Q.4. What would the costs be for homeowners in low risk areas?
A.4. Similar to Preferred Risk Policy (PRP) now. However, under
the current pricing scheme and surcharge mandated by Congress,
the surcharge essentially equals the premium, so the surcharge,
which is not risk based but artificial, needs to be
appropriately reduced or eliminated.
Q.5. How would this help sure (shore?) up the NFIP program and
what risks would it present?
A.5. By coming into closer harmony with a basic tenet of
insurance--spreading the risk by increasing the risk pool (both
by class of structure and geographically). Even now, the NFIP
has an adversely selected portfolio--very high-risk areas have
concentrations of policies whereas low risk areas are
chronically underinsured. The more policies in the program, the
lower the rates, in general. More people would have to buy, but
if rates in low risk areas are really low, and paid monthly
that would help homeowners manage costs.
Q.6. Private Flood Insurance and Sustainability of the NFIP: If
private flood insurance is structured the right way it could
play a helpful role within our Federal flood insurance system;
however I have real concerns about cherry-picking and the
impact that could have on the long-term risks for the NFIP.
Mr. Larson, in your testimony you express similar concerns
about cherry-picking. How can we design a minimum coverage
standard, or other sensible protections, that would allow for
more private flood insurance without draining the best risk
from the NFIP?
A.6. Level the field so private competes fairly--and this cuts
both ways. The NFIP cannot be at a competitive disadvantage to
private flood and vice versa. This means a couple of things:
First, private pays an equivalent policy fee to pay for
mapping, mitigation and floodplain management, and the private
policy must truly meet the minimums of the NFIP policy
mentioned in next question.
Second, in order for the communities to have access to
private insurance, as with NFIP, communities must continue in
good standing to participate in the NFIP, meeting at least the
program's minimum floodplain management standards.
Third, private policies must have at least some of the
required elements of 42 U.S.C. 4012a(b) that are in existing
law now--specifically the provision of flood insurance coverage
which is at least as broad as the coverage provided under a
standard flood insurance policy under the national flood
insurance program, including when considering deductibles,
exclusions, and conditions offered by the insurer and the
additional loss payee provision to ensure that claims go back
into repairing the damaged building.
The private flood proposals being considered by Congress
eliminate this consistency requirement, which puts the NFIP on
the hook for very high-risk properties that private insurers
will not insure through a continuous coverage provision. If the
NFIP is to accept a private policy from a continuous coverage
standpoint, shouldn't it be an ``apples to apples'' situation?
ASFPM is strongly opposed to eliminating the requirements of
4012a(b) as we are witnessing a private flood market that is
now already growing, WITH these requirements in place.
Q.7. If we decide to make the standard for private policies
that they must be ``at least as broad as coverage under a
standard flood insurance policy'' who should be making the
determination of whether an individual private policy meets
that standard? Are there challenges with allowing state
Insurance Commissioners the option to make this determination,
and if so, what are they?
A.7. First, the agencies overseeing lenders should complete
their job of defining ``at least as broad''. This levels the
field. Second, FEMA can be helpful in this regard and should be
directed to assist (we have elaborated on this point in our
written testimony). ASFPM is concerned there will be challenges
with 50 State insurance commissioners having 50 different
definitions for a program that applies nationally. Those 50
States can address other aspects of the insurance company, but
the equivalent policy issue must be nationally consistent.
Q.8. One interesting way to better align incentives and risks
between the private sector and Federal Government would be by
having the Federal Government and private sector split losses
and benefits on every policy. For example, you could have a
design where for each dollar of loss or dollar of premium,
there's a predetermined percentage of risk sharing between the
Government and private sector. Could an approach like this be
effective within the NFIP?
A.8. This sounds simple, but would likely be complex to
administer. Private insurance is already expanding in the
Nation, and if the NFIP rates continue toward actuarial, should
increase. As long as the playing field is level, they should be
able to coexist. ASFPM is aware of a proposal in the Cassidy-
Gillibrand discussion draft, which establishes a pilot program
for risk sharing with the private sector. We are supportive of
trying this concept out on a purely pilot basis.
Q.9. Mitigation: In North Dakota we spend a lot of our
resources on finding ways to mitigate flood damage. Many of our
local homebuilders have built homes above and beyond local
building codes in order to make sure homes are less susceptible
to flooding. However, under the current system, many of these
costs go unrecognized for purposes of lower flood insurance
premiums.
Where can we make improvement to recognize mitigation
efforts, not just at the community level, but at the
homebuilder level?
A.9. There seems to be a misperception here. In fact, the
current system recognizes many building standards that truly
reduce the flood risk. The simplest way is to adopt a
freeboard--or a building first floor elevation level above the
base (100-year) flood. For example, if the first floor of a
building is above the BFE (regulatory flood level--usually the
100-year flood level) reductions in premium rates look like
this:
------------------------------------------------------------------------
Feet above BFE for first floor Premium reduction
------------------------------------------------------------------------
1 foot.............................. A zone 50% V zone 18%
2 foot.............................. A zone 68% V zone 38%
3 foot.............................. A zone 74% V zone 55%
------------------------------------------------------------------------
These are data that Chad Berginnis (ASFPM) updated using
April 2017 premium rates. Communities should also be encouraged
to work with lenders, homebuilders, and realtors to inform
homeowners of the long-term benefits of investment in prudent
higher building elevations to reduce flood risks and insurance
costs, currently and into the future. During new construction,
one foot of elevation adds only about 1 percent to costs.
Additional Material Supplied for the Record
SMARTSAFER NATIONAL FLOOD INSURANCE PROGRAM REFORM PROPOSAL, FEBRUARY
2017
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
AN ILLUSTRATION OF THE BENEFITS OF PRIVATE MARKET DEPOPULATION AND
REINSURANCE RISK TRANSFER
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF THE REINSURANCE ASSOCIATION OF AMERICA
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY THE CONSUMER FEDERATION OF AMERICA
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]