Senate Report 108-262 - FLOOD INSURANCE REFORM ACT OF 2004

[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

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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.