[Senate Report 108-262]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 513
108th Congress                                                   Report
                                 SENATE
 2d Session                                                     108-262
======================================================================


 
                   FLOOD INSURANCE REFORM ACT OF 2004

                                _______
                                

                  May 13, 2004.--Ordered to be printed

                                _______
                                

 Mr. Shelby, from the Committee on Banking, Housing and Urban Affairs, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 2238]

    The Committee on Banking, Housing, and Urban Affairs to 
which was referred the bill (S. 2238) to amend the National 
Flood Insurance Act of 1968 to reduce losses to properties for 
which repetitive flood insurance claim payments have been made, 
reports favorably thereon with amendments and recommends that 
the bill, as amended, do pass.
    On March 30, 2004 the Committee voted unanimously to report 
the bill to the Senate for consideration as promptly as 
circumstances permit.

                      HEARING RECORD AND WITNESSES

    On March 25, 2004, the Economic Policy Subcommittee heard 
from a variety of witnesses as to concerns facing the National 
Flood Insurance Program.
    The Subcommittee heard from United States Senator Barbara 
Mikulski, United States Representative Doug Bereuter, and 
United States Representative Earl Blumenauer.
    In addition, the Subcommittee heard from the Honorable 
Anthony Lowe, Federal Insurance Administrator and Mitigation 
Division Director, Federal Emergency Management Agency; and Mr. 
William Jenkins, Jr., Director--Homeland Security and Justice, 
U.S. General Accounting Office.
    Also appearing before the Subcommittee were Mr. William 
Stiglitz, III, Hyland, Block, Hyland Insurance of Louisville, 
KY; Mr. Steven M. Feldmann, Director of Community Affairs, The 
Fischer Group, Crestview Hills, KY; Mr. Chad Berginnis, CFM, 
Chair, Association of State Flood Plan Managers; and Mr. Greg 
Kosse, Associate General Counsel, Kentucky Farm Bureau Mutual 
Insurance Company.
    The Flood Insurance Reform Act of 2004 is intended to 
address the problems of severe repetitive loss properties--
those that have been flooded numerous times, and are thus a 
financial drain on the National Flood Insurance Program (NFIP).

                  BACKGROUND AND NEED FOR LEGISLATION

    NFIP is a federal insurance program, that provides flood 
insurance to over 4.4 million property owners across the United 
States. This program was established in 1968 to ``provide the 
necessary funds promptly to assure rehabilitation or 
restoration of damaged property to pre-flood status or to 
permit comparable investment elsewhere.'' (Senate Report 90-549 
and House Report 90-786)
    Approximately one-third of all insured properties are pre-
FIRM (Flood Insurance Rate Map) properties, built prior to 1974 
or before a flood map was available incorporating the property. 
These properties pay subsidized insurance rates since the risks 
to the property were not known at the time of construction. In 
an effort to make sure that buildings and homes are not built 
in harm's way, those properties constructed after 1974 in 
communities that participate in NFIP must meet local floodplain 
ordinances. These local floodplain ordinances have helped to 
ensure that homes built in flood-prone areas are adequately 
elevated and/or flood-proofed. These homes account for 
approximately two-thirds of insured properties, and pay 
actuarial sound rates, to reflect their actual risk of flood 
loss.
    While NFIP has, for the most part, been able to cover 
losses through the premiums it charges to policyholders, there 
have been times when NFIP has had to borrow from the U.S. 
Treasury to cover losses. NFIP has paid back all of the 
borrowed funds with interest; however, it is clear that one of 
the largest drains on the program are repetitive loss 
properties. While NFIP operates a basic mitigation program for 
all repetitive loss properties, it is a small program, and 
lacks the resources to mitigate many of the homes in need of 
elevation, floodproofing, and other mitigation activities. 
Repetitive loss properties only account for approximately 1 
percent of all insured properties, yet according to FEMA, these 
properties account for over 30% of amounts paid in claims. Most 
of these properties are pre-FIRM properties, and are paying 
subsidized rates for flood insurance.

                   PURPOSE AND SUMMARY OF LEGISLATION

    The Flood Insurance Reform Act of 2004 reauthorizes the 
flood insurance program for 5 years, ensuring that there will 
be no lapse in this critical program, while helping local 
communities and states work to mitigate repetitive loss 
properties. Under this bill, states and communities will be 
able to opt into a new $40 million pilot program, designed to 
mitigate those properties that have had over 3 flood claims of 
over $3,000 each, and cumulative claims of over $15,000 (severe 
repetitive loss properties). This will ensure that those 
properties that have the most claims and flood damages will 
have an opportunity to receive federal mitigation funds.
    Under this 5 year pilot program, communities will have to 
pay between 10 and 25 percent of the costs of mitigation 
activities, while the federal pilot program will cover 75 to 90 
percent of the costs. Communities will make mitigation offers, 
including elevation, demolition/rebuilding, flood-proofing, or 
buyouts, to severe repetitive loss properties. Unlike the basic 
mitigation program, if an owner of a severe repetitive loss 
property refuses a reasonable mitigation offer, the premiums 
for flood insurance will be increased by 50%. The rates will 
increase by an additional 50% after each flooding event 
resulting in a claim to NFIP of over $1,500. Property owners 
will have the ability to appeal any decision to increase rates 
subsequent to the refusal of a mitigation offer. In no case 
will a property be ineligible for flood insurance, unless a 
fraudulent claim is filed. In no instance will an owner pay 
more than the actuarial rate for flood insurance. In order for 
a property owner to have their rates raised after subsequent 
flooding, an offer of mitigation must still be available. It is 
clear that in some cases, communities will have spent their 
mitigation funds and will no longer be able to offer mitigation 
assistance in those cases.
    States and communities will be able to opt in to the pilot 
mitigation program. No community will be forced to participate 
in the pilot program regardless of the state's participation. 
The Committee expects that states will work with communities on 
identifying properties that will receive mitigation offers and 
the kinds of mitigation offers that would be made to property 
owners.
    This bill provides an additional $40 million for mitigation 
activities, and is meant to provide an incentive to communities 
to provide mitigation assistance to those properties that have 
had numerous floods. While no community will be forced to 
participate, the Committee anticipates that many communities 
will welcome these additional mitigation funds. While a 
consequence is attached to refusing a mitigation offer, it is 
the Committee's understanding that $40 million covers only a 
small percentage of properties that need to be mitigated, and 
thus, communities should have no problem in finding residents 
of severe repetitive loss properties who are interested in 
receiving mitigation assistance voluntarily. In many cases, 
families who have been repeatedly flooded will welcome the 
opportunity to elevate their existing homes or to be given 
assistance in relocating. Many families are stuck in a cycle of 
flooding with no means to mitigate and reduce the risk of the 
loss of life and property. This bill provides funding to allow 
these families to get out of this cycle. The Committee urges 
communities to work with those families who volunteer to take 
part in this program. In addition, communities should fund the 
most cost-effective mitigation activities to make sure that the 
flood risks can be minimized to as many properties as possible.
    While the bill does not contain a formula for the 
distribution of funds, it does provide that funds shall be 
offered in a way that results in the greatest savings to the 
flood insurance program in the shortest period of time. Many 
areas are prone to repeated flooding, and should be targeted 
with mitigation funds to allow families to rebuild and/or 
flood-proof their homes. While some properties may not flood in 
a way that results in individual high dollar claims to NFIP, 
mitigation funds should also be used where repeated low-level 
claims (above $3,000 each) threaten the ability of families to 
continue to live in their homes, and continue to destroy 
portions of homes and possessions.
    In addition to funding mitigation activities, the Flood 
Insurance Reform Act of 2004 also makes some programmatic 
changes to NFIP to help address administrative problems that 
were brought to the Committee's attention. As a result, flood 
victims who are covered under NFIP are finding that their flood 
insurance does not come close to covering the cost to repair 
their flood damage. This is troubling given Congressional 
intent in establishing this program in 1968. NFIP is not 
working in a way that allows flood victims to easily make 
claims or collect payments under their flood insurance 
policies. NFIP does not provide simple forms or claims 
guidelines for flood victims to follow, making access to 
information about NFIP and flood insurance policies difficult 
to attain.
    The reported bill helps to provide some assurance that 
families will receive the informationthey need to understand 
their flood insurance policies, how to file claims after a flood loss, 
and how to follow those claims to completion to ensure proper 
settlement. FEMA will be required to provide simple and complete 
information to policyholders at the time of purchase, renewal and at 
the time of flood loss. FEMA should work with interested parties, such 
as insurance companies, insurance agents, adjusters, policyholders, and 
state and local officials, to ensure that policyholders are provided 
with accurate and timely information. In addition, the reported 
legislation requires FEMA to establish a formal appeals process so that 
flood victims who believe they are not being offered an adequate 
settlement can have their complaints heard. Unfortunately, FEMA does 
not currently have an appeals process, so flood victims who do not 
agree with adjuster estimates have no official recourse. This bill will 
ensure that all flood victims have adequate recourse if they disagree 
with decisions regarding their claims and settlements.
    The reported bill also requires FEMA to establish minimum 
insurance agent training requirements. Insurance agents are the 
main points of contact for most policyholders, and are 
therefore the main source of information about the flood 
insurance program. In establishing education and training 
requirements, FEMA should work with interested parties, 
including insurance companies and agents as well as state 
regulators, where possible. In some cases, states may already 
have requirements to ensure that agents are well-versed in the 
flood insurance program. Where possible, FEMA should work to 
make sure that agents are not burdened with inconsistent state 
and federal training and education requirements. In addition, 
where possible, FEMA should work to implement the training 
requirements through the states, which already have continuing 
education processes in place.
    As with any information that FEMA disseminates, whether 
guidance, notices, or training materials, the Committee expects 
FEMA to make its policies as clear and transparent as possible 
and to follow the letter and spirit of such formal policies and 
decisions. It has come to the Committee's attention that in 
some instances FEMA is using unwritten rules or policies to 
make decisions, leaving policyholders, insurance agents and 
others with no way of knowing what rules are to be used in the 
program. The goal of Title II of this program is to make the 
program more transparent and understandable. The Committee 
expects FEMA to work to make sure decisions and policies are 
consistent and public.
    The reported legislation also requires the General 
Accounting Office to conduct a study of the National Flood 
Insurance Program. The GAO has been tasked with undertaking a 
comprehensive study of why many flood victims are not receiving 
adequate payments under NFIP. GAO will study the adequacy of 
payments to flood victims and how FEMA and adjuster practices 
affect the payments, as well as whether the limitations on 
flood insurance coverage, as contained in the current policy, 
work to the detriment of flood victims in their efforts to 
repair their homes. FEMA should also conduct a comprehensive 
review of their rules and the current flood insurance policy, 
to determine if changes should be made to ensure that families 
who are flooded receive adequate payments under their flood 
insurance policies to allow them to repair or rebuild their 
homes.
    The Committee is aware of many problems in the flood 
insurance program as a result of recent flooding from Hurricane 
Isabel, which took place in September, 2003. As a result of 
this flood, 24,000 claims were made to NFIP. Unfortunately, 
many flood victims did not receive adequate settlements under 
NFIP to allow them to repair their homes. While the changes 
contained in this bill will ensure that future flood victims do 
not face these same problems, we expect FEMA to conduct a 
thorough review of all claims resulting from Hurricane Isabel, 
and to re-adjust those claims where flood victims did not 
receive fair and adequate payments. The Committee expects the 
review of claims to be an independent process, where adjusters 
are not reviewing claims for which they were initially 
responsible after Hurricane Isabel. FEMA must make all efforts 
to ensure that the claims in question are settled fairly.
    The Committee also recognizes and encourages FEMA in its 
goal to eventually hand over the legal authority to oversee, 
maintain and administer flood mapping to states which are 
interested and capable of maintaining and administering their 
own flood mapping program. This includes the responsibility to 
publish maps, issue letters of map change, preliminary and 
post-preliminary processing and issuance of Flood Insurance 
Study reports, Digital Flood Insurance Rate Maps and authorize 
interested and capable states to charge review and processing 
fees for Letters of Map Change.

                      SECTION-BY-SECTION ANALYSIS

Section 1. Short title; table of contents

    This section establishes the title of the bill, the ``Flood 
Insurance Reform Act of 2004'' and provides a table of 
contents.

Section 2. Congressional findings

           TITLE I--AMENDMENTS TO FLOOD INSURANCE ACT OF 1968


Section 101. Extension of program and consolidation of authorizations

    This section amends the National Flood Insurance Act of 
1968 by extending the National Flood Insurance Program (NFIP) 
from June 30, 2004 through September 30, 2008

Section 102. Establishment of pilot program for mitigation of severe 
        repetitive loss properties

    This section amends the National Flood Insurance Act of 
1968 by adding a new Section 1361A which would establish a 
Pilot Program for the mitigation of severe repetitive loss 
properties. Under this section, the Director of FEMA may 
provide financial assistance to States and communities for the 
mitigation of severe repetitive loss properties.
    ``Severe repetitive loss properties'' are properties:
    For which three or more separate NFIP flood insurance 
claims payments have been made prior to the date of the 
enactment of this Act, with the cumulative amount of such 
claims payments exceeding $15,000; or
    For which 2 or more separate NFIP claims payments 
cumulatively exceed the value of the insured property.
    The Director of FEMA shall provide mitigation offers for 
properties under the Pilot Program in the order that will 
result in the greatest amount of savings to the National Flood 
Insurance Fund in the shortest period of time. Mitigation 
activities include elevation, relocation, demolition, 
rebuilding at least one foot above Base Flood Elevation, flood-
proofing of structures, minor physical localized flood control 
projects, and buyouts.
    If an offer for mitigation under the pilot program is 
refused and any appeal is unsuccessful, rates for severe 
repetitive loss properties will be increased by 50%. Properties 
will be subject to additional 50% increases for each subsequent 
flood event where claims payments exceed $1,500. Flood 
insurance rates, under any segment of the program, cannot be 
higher than the actuarial based NFIP rates. The Director is 
authorized to offer the policyholder a higher deductible for 
the flood insurance policy which would result in a lower 
premium payment if mitigation is refused.
    Any owner of a severe repetitive loss property may appeal 
an increase to an actuarial rate of insurance to an arbitrator. 
One of the grounds for appeal is that the owner of the property 
will not be able to purchase a replacement primary residence of 
comparable value that is functionally equivalent to their 
current residence.
    Up to an additional $40 million for fiscal years 2004, 
2005, 2006, 2007, and 2008 can be transferred from the National 
Flood Insurance Fund to the National Flood Mitigation Fund for 
severe repetitive loss properties and shall remain available 
until expended. The policyholders shall not be subject to 
higher premium rates for flood insurance coverage because of 
this transfer from the insurance fund into the mitigation fund. 
As a matter of clarification, the policy service fee charged by 
FEMA for each policy shall also not be increased because of 
this transfer.

Section 103. Amendments to existing flood mitigation assistance program

    This section amends the National Flood Insurance Act of 
1968 by extending the National Flood Insurance Program (NFIP) 
from June 30, 2004 through September 30, 2008. This section 
also amends Section 1366 of the National Flood Insurance Act of 
1968 by directing FEMA to offer mitigation assistance under the 
existing FMA program in a manner consistent with the best 
interests of the NFIP.
    Up to an additional $40 million shall be transferred from 
the insurance fund into the FMA fund for fiscal years 2004, 
2005, 2006, 2007, and 2008 for the existing mitigation 
assistance program.

Section 104. FEMA authority to fund mitigation activities for 
        individual repetitive claims properties

    This section creates a new Section 1323 of the National 
Flood Insurance Act of 1968, authorizing the Director to 
provide funding for mitigation actions for individual 
properties for which one or more claims payments for losses 
have been made if such activities are in the best interest of 
the National Flood Insurance Fund, and such activities cannot 
be funded under the Flood Mitigation Assistance Program because 
the requirements of the Flood Mitigation Assistance Program are 
not being met by the State or community in which the property 
is located; or the State or community does not have the 
capacity to manage such activities.
    Up to an additional $10 million shall be transferred from 
the National Flood Insurance Fund into the National Mitigation 
Fund for any fiscal year for these individual repetitive claims 
properties. The policyholders shall not be subject to 
offsetting collections through premium rates for flood 
insurance coverage. As a matter of clarification, the policy 
service fee charged by FEMA for each policy shall also not be 
increased because of this transfer.

Section 105. Amendments to additional coverage for compliance with land 
        use and control measures

    Section 1304(b) of the National Flood Insurance Act, 
established FEMA's ``Increased Cost of Compliance (ICC),'' 
authority. This authority is intended to pay for mitigation of 
those insured properties that have sustained repetitive losses 
and severe losses that have been identified as drains on the 
National Flood Insurance Fund. Since 1997 policyholders have 
been charged from $3 to $75 per year, contributing nearly $80 
million a year to the insurance fund. This section amends 
FEMA's ICC authority to increase its effectiveness by: (1) 
clarifying that additional insurance coverage is to cover the 
cost of implementing mitigation measures; and, (2) clarifying 
the definition of ``repetitive loss structures'' and 
``substantially damaged structure.''

Section 106. Actuarial rate properties

    This section amends Section 1308 of the National Flood 
Insurance Act of 1968 by charging actuarial based NFIP rates 
immediately for Federally leased properties located on the 
river-facing side of any dike, levee, or other riverine flood 
control structure, or seaward of any seawall, or other coastal 
flood control structure. These actuarial rates are not 
conditioned upon any other factor.

Section 107. Geospatial digital f ood hazard data

    This section creates a new section of the National Flood 
Insurance Act of 1968, to allow for a digital representation of 
the special flood hazard area theme to have equal legal 
standing in the program as the effective printed Flood 
Insurance Rate Map.

Section 108. Replacement of mobile homes on original sites

    This section adds a new Section 1315 to the National Flood 
Insurance Act of 1968 which states that the replacement of 
mobile homes on any sites shall not affect the eligibility of 
any community to participate in the flood insurance program if 
the following occurs: such mobile home was previously located 
on such site; such mobile home was relocated from such site 
because of flooding that threatened or affected such site; and 
such replacement is conducted not later than the expiration of 
the 180-day period that begins upon the subsidence (in the area 
of such site) of the body of water that flooded to a level 
considered lower than flood levels.

Section 109. Reiteration of FEMA responsibility to map mudslides

    This section states that, as directed in section 1360(b) of 
the National Flood Insurance Act, the Director of FEMA is again 
directed to accelerate the identification of risk zones within 
flood-prone and mudslide-prone areas in order to make known the 
degree of hazard within each such zone at the earliest possible 
date.

                   TITLE II--MISCELLANEOUS PROVISIONS

    Title II requires FEMA to take actions to make sure that 
all policyholders understand their flood insurance policies and 
are treated fairly in making claims and receiving settlements 
after flood losses.

Section 201. Definitions

    This Section provides definitions of the following terms: 
``Director,'' ``Flood Insurance Policy,'' and ``Program.''

Section 202. Supplemental Forms

    This section requires FEMA to develop simple, easy to read 
forms for use within 6 months, to be given to all policyholders 
at the time of issuance and renewal, explaining exactly what is 
and is not covered in the flood insurance policy being 
purchased/renewed. This information should include the exact 
coverages being purchased, and exclusions from coverages, along 
with an explanation, including examples, of how items will be 
valued under the policy at the time of loss. In addition, the 
form should contain information on the number and dollar amount 
of any claims filed under NFIP with respect to that property. 
FEMA should make such information readily available to the 
insurance companies and agents responsible for providing the 
information to policyholders, if necessary.

Section 203. Acknowledgment Form

    This section requires FEMA to develop, within 6 months, a 
form to be signed by the policyholder at the time of purchase 
and renewal, acknowledging that the policyholder has been given 
a copy of their flood insurance policy and any supplemental 
forms, as well as acknowledging that the person has been told 
that contents are not covered under the standard flood 
insurance policy, but additional insurance is available for 
that purpose. All purchasers of flood insurance should be told 
that their possessions are not covered by the standard flood 
insurance policy, and should be given an opportunity to 
purchase coverage for contents/possessions.

Section 204. Flood Insurance Claims Handbook

    This Section requires FEMA to develop, within 6 months, a 
claims handbook to be given to all policyholders at the time of 
purchase, renewal and the time of loss, and to all insurance 
companies, agents and adjusters. The claims handbook should 
contain all information about claims, proof of loss 
requirements, and settlements, relevant to a flood victim 
filing and settling a claim under NFIP. The claims handbook 
should also contain information about the appeals process 
developed under Section 205. The claims handbook should be as 
simple as possible, yet it should contain all necessary 
information regarding claims and how they will be handled and 
settled, and what flood victims can do if they have any 
problems.

Section 205. Appeal of Decisions Relating to Flood Insurance Coverage

    This section requires FEMA to establish a formal appeals 
process for flood victims within 6 months. FEMA must establish 
a formal, fair process for flood victims to follow to appeal 
decisions of FEMA or its contractors, insurance companies, 
insurance agents and adjusters regarding claims, proofs of 
loss, loss estimates and settlements under NFIP. Such an 
appeals process must ensure that all flood victims have a way 
to appeal what they believe are incorrect estimates and 
decisions regarding their claims and settlements, and should 
include the readjustment of claims and settlements where 
necessary. FEMA must ensure that all policyholders are aware of 
their rights to appeal and of the process established by FEMA 
under this Section.

Section 206. Study and Report on Use of Cost Compliance Coverage

    This Section requires FEMA to submit a report to Congress, 
within one year, on the use of compliance coverage (Increased 
Cost of Compliance) funds. Such funds are used to bring 
substantially damaged buildings into compliance with local 
ordinances and building codes. This section requires that FEMA 
submit a report on the use of such funds, any barriers to using 
the funds, and recommendations about how to overcome any 
barriers so that more flood victims can access Increased Cost 
of Compliance funds when needed.

Section 207. Minimum Training and Education Requirements

    This Section requires FEMA to establish minimum education 
and training requirementsfor all insurance agents, and to 
publish such requirements within 6 months. In working to devise 
education and training requirements, FEMA should consult with all 
interested parties, including insurance companies and agents, as well 
as state insurance regulators. While training requirements should not 
be burdensome, they should ensure that insurance agents, the main 
points of contact for policyholders and flood victims, have a thorough 
understanding of the National Flood Insurance Program.

Section 208. GAO Study And Report

    This Section requires the General Accounting Office to 
conduct a thorough review of the National Flood Insurance 
Program, focusing on the adequacy of payments to flood victims 
under their flood insurance policies, and report to Congress on 
those findings within a year. The Committee is concerned that 
flood victims may not be receiving adequate settlements after 
flood losses to repair their damages, and this Section asks GAO 
to study the causes for this, including the limitations and 
exclusions contained in the standard flood insurance policy, as 
well as FEMA rules and adjuster practices that may lead to 
inaccurate estimates of losses.

Section 209. Prospective Payment of Flood Insurance Premiums

    This section clarifies that where FEMA determines that a 
policyholder is paying too little in premiums due to an error 
in the flood plain determination (made by FEMA or a third 
party), FEMA may adjust the premiums immediately, but may only 
charge the policyholder the increased premium prospectively. 
FEMA may no longer charge policyholders retroactively if the 
error in premiums charged is due to an error in the floodplain 
determination.

Section 210. Report on Changes to Fee Schedule or Fee Payment 
        Arrangements

    This Section requires FEMA to review its policies and 
practices regarding how it pays adjusters. The Committee is 
concerned that the way FEMA currently compensates adjusters may 
provide an incentive to complete adjustments and proofs of loss 
quickly, but not necessarily accurately. This Section requires 
FEMA to review its adjuster fee schedules and fee arrangements, 
and report back to Congress within 3 months on the findings and 
any changes made by FEMA to address these concerns.

                      REGULATORY IMPACT STATEMENT

    In accordance with paragraph 11(b), rule XXVI, of the 
Standing Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact of the bill.
    The Flood Insurance Reform Act of 2004 is intended to 
address the problems of severe repetitive loss properties--
those that have been flooded numerous times, and are thus a 
financial drain on the National Flood Insurance Program (NFIP). 
The long term goal of the pilot program, established in Section 
102 of the reported bill, is to buy-out or mitigate those 
properties that have been the largest drain on the fund. In 
doing so, the Committee believes the National Flood Insurance 
Program will move toward actuarial soundness and no longer 
require a federal subsidy.
    Currently the national flood insurance program insures 
approximately 4,400,000 policyholders. Approximately 48,000 
properties currently insured under the program have 
experienced, within a 10-year period, 2 or more flood losses 
where each such loss exceeds the amount $1,000. Of these 
repetitive-loss properties, approximately 10,000 have 
experienced either 2 or 3 losses that cumulatively exceed 
building value or 4 or more losses, each exceeding $1,000. 
Repetitive-loss properties constitute a significant drain on 
the resources of the national flood insurance program, costing 
about $200,000,000 annually. In addition, repetitive-loss 
properties comprise approximately 1 percent of currently 
insured properties but are expected to account for 25 to 30 
percent of claims losses.
    Currently about two-thirds of policy holders pay an 
actuarially fair rate. These properties would not be directly 
impacted by the establishment of the pilot program. In fact, as 
the pilot program addresses worst case repetitive-loss 
properties, overall rates for actuarial rate properties should 
decline. For those repetitive-loss property holders that are 
subject to a buy-out or mitigation offers, it is expected that 
such policyholders will be fairly compensated for their 
properties, in the case of a buy-out, or that mitigation will 
increase the value or enjoyment of their homes. As FEMA is 
directly to concentrate on repetitive-loss property owners that 
wish to participate, it is expected that economic impact on 
such policyholders will be positive.
    It is expected that the reported bill will have no impact 
on the personal privacy of the current or prospective flood 
insurance policyholders.
    As Title II of the reported bill is intended to improve the 
quality and timeliness of information received by 
policyholders, the Committee expects the time and effort 
required on the part of policyholders to file claims will be 
substantially reduced. In particular the creation, by FEMA, of 
a Flood Insurance Claims Handbook, as required by Section 204 
of the reported bill, should save policyholders, insurance 
agents and insurance companies considerable time in the 
processing of claims.

                        COST OF THE LEGISLATION

                                                    April 22, 2004.
Hon. Richard C. Shelby,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 2238, the Flood 
Insurance Reform Act of 2004.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Julie 
Middleton.
            Sincerely,
                                      Elizabeth M. Robinson
                               (For Douglas Holtz-Eakin, Director).
    Enclosure.

Flood Insurance Reform Act of 2004

    Summary: S. 2238 would extend the National Flood Insurance 
Program (NFIP) within the Department of Homeland Security (DHS) 
until 2008. Under current law, the program expires on June 30, 
2004. The bill also would establish a pilot program to give 
states and local communities financial assistance for 
mitigating potential future damages experienced by ``severe 
repetitive loss properties'' (properties that have made 
multiple sizable claims under the NFIP). The bill would 
authorize the appropriation of $40 million a year over the 
2004-2008 period for this new pilot program. S. 2238 also would 
increase the amounts authorized to be appropriated for the 
existing flood mitigation program by $20 million each year. 
Finally, the bill would authorize the appropriation of an 
additional $10 million a year for mitigating potential flood 
damage to individual properties in states and communities that 
do not have the capacity to manage their own mitigation 
programs.
    Assuming appropriation of the authorized amounts, CBO 
estimates that implementing the bill would result in 
discretionary outlays totaling $300 million over the 2004-2009 
period. CBO also estimates that direct spending would decline 
by $1 million a year relative to the budget resolution baseline 
(which assumes the flood insurance program continues over the 
2004-2014 period).
    S. 2238 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 2238 is shown in the following table. 
The costs of this legislation fall within budget function 450 
(community and regional development).

----------------------------------------------------------------------------------------------------------------
                                                                  By fiscal year, in millions of dollars--
                                                           -----------------------------------------------------
                                                              2004     2005     2006     2007     2008     2009
----------------------------------------------------------------------------------------------------------------
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Authorization level.......................................       40       70       70       70       70       30
Estimated Outlays.........................................        8       35       55       70       70       62

                                           CHANGES IN DIRECT SPENDING

Estimated budget authority................................        0       -1       -1       -1       -1       -1
Estimated outlays.........................................        0       -1       -1       -1       -1       -1
----------------------------------------------------------------------------------------------------------------

    Basis of Estimate: For this estimate, CBO assumes that S. 
2238 will be enacted in fiscal year 2004 and that the 
authorized amounts will be appropriated each year. Estimates of 
outlays are based on historical spending patterns of similar 
programs and information from the Department of Homeland 
Security.

Spending Subject to Appropriation

    S. 2238 would authorize the appropriation of $40 million in 
2004, $70 million a year through 2008, and $30 million a year 
after 2008 for programs to reduce potential future damages to 
properties that have experienced repetitive losses from floods. 
Assuming appropriation of the authorized amounts, CBO estimates 
that the resulting outlays would total $300 million over the 
2004-2009 period.
    According to DHS, about 48,000 properties with federal 
flood insurance have experienced two or more flood losses. DHS 
estimates that, under the proposed pilot program in S. 2238, 
approximately 7,500 severe repetitive loss properties would 
benefit immediately from mitigation activities such as 
increased elevation, relocation, demolition, or flood-proofing. 
Mitigating those properties could result in fewer claims paid 
by the federal flood insurance program following a subsequent 
flood.
    For example, if DHS first mitigates properties with the 
highest ratio of benefits to cost--estimated to be 2,500 
properties--DHS expects that it would take five to seven years 
to realize sufficient savings to cover the original cost of 
mitigation. If DHS then targets the remaining 5,000 that have a 
high ratio of benefits to costs, DHS expects that it could take 
eight to 10 years to realize sufficient savings to cover the 
cost of mitigation.
    The average federal cost of a mitigation project is 
$66,000. CBO estimates that implementing the pilot program and 
expanding the current mitigation program would cost $300 
million over the next five years and could finance the 
mitigation costs of over 4,500 properties. Over the next 10 
years, some or all of such costs would likely be recouped 
through lower claims payments, depending on the effectiveness 
of the mitigation efforts and the location and severity of 
future floods. The amount of such savings is difficult to 
predict because there is limited information about the 
effectiveness of prior mitigation efforts. Savings from lower 
future claims cannot be attributed directly to S. 2238 because 
the size and duration of any mitigation program would depend on 
amounts provided in future appropriation acts.
    Under the bill, if an owner of a property refuses to 
participate in federal mitigation programs, the government 
would increase the premium rate for flood insurance to 150 
percent of the chargeable rate for the property at the time of 
the original mitigation offer. If that same property sustains 
flood damage and receives a claim payment of $1,500 or more, 
the government would increase the premium rate again to 150 
percent of the chargeable rate for the property at the time of 
the flood. The premium rate could not exceed the actuarial rate 
for the area where the property is located.
    For example, the average annual subsidized flood insurance 
premium, according to DHS, is $436. If a property owner with a 
subsidized premium refused mitigation, the premium would 
increase to $654. If that same property then sustains damage 
from a flood and receives a payment of $1,500, the insurance 
premium for that property would increase again to $981. If 25 
percent of the 7,500 properties refused mitigation and then 
sustain damage from a flood, the National Flood Insurance Fund 
would collect about $1 million more a year in premiums. The 
actual amount of any additional premiums collected under that 
provision also would depend on the scope of the mitigation 
program, which would be determined in future appropriation 
acts.
    CBO estimates that implementing the administrative 
provisions in this bill, including a flood insurance claims 
handbook and a report by the General Accounting Office on the 
adequacy of the flood insurance program, would cost less than 
$500,000 over the 2004-2005 period, subject to the availability 
of appropriated funds.

Direct Spending

            Reauthorization of the National Flood Insurance Program
    S. 2238 would reauthorize the NFIP through 2008. Consistent 
with section 257 of the Balanced Budget and Emergency Deficit 
Control Act, which specifies that certain expiring programs 
should be assumed to continue for budget projection purposes, 
the baseline projections underlying the current Congressional 
budget resolution assume that the National Flood Insurance 
Program continues beyond its scheduled expiration date. Over 
the near term, CBO projects that premiums collected by the 
National Flood Insurance Fund equal claims paid from the fund. 
(In fact, claims vary substantially from year to year, and net 
outlays are unlikely to be zero in a particular year.) In most 
recent years, premium income has exceeded claims payments, but 
over the long term, the NFIP is not considered to be 
actuarially sound because some properties receive subsidized 
insurance.
            Actuarial Rate Properties
    S. 2238 would make certain federally owned coastal and 
river properties that are leased to nonfederal entities subject 
to actuarially sound insurance premiums. CBO estimates that 
this provision would increase the amount of premiums collected, 
but the increase would be less than $1 million a year because 
of the small number of properties involved.
    Intergovernmental and Private-Sector Impacts: S. 2238 
contains no intergovernmental or private-sector mandates as 
defined in UMRA. State, local, and tribal governments would 
benefit from the new grant program for mitigation projects. Any 
cost incurred by those governments would be voluntary.
    Previous CBO Estimates: On September 3, 2003, CBO 
transmitted a cost estimate for H.R. 253, a similar bill that 
was ordered reported by the House Committee on Financial 
Services on July 23, 2003. The differences in the CBO cost 
estimates for those two bills stem from different levels of 
authorized funding.
    Estimate Prepared by: Federal Costs: Julie Middleton. 
Impact on State, Local, and Tribal Governments: Melissa 
Merrell. Impact on the Private Sector: Paige Piper/Bach.
    Estimate Approved by: Robert A. Sunshine, Assistant 
Director for Budget Analysis.

                 CHANGES IN EXISTING LAW (CORDON RULE)

    On March 30, 2004, the Committee unanimously approved a 
motion by Senator Shelby to waive the Cordon rule. Thus, in the 
opinion of the Committee, it is necessary to dispense with the 
requirement of section 12 of rule XXVI of the Standing Rules of 
the Senate in order to expedite the business of the Senate.

                                
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