Delaying new flood insurance rates is a bad idea

In March 2011, the chairman of the National Association of Mutual Insurance Companies testified before House Financial Services Subcommittee on Insurance, Housing and Community Opportunity on the need to reform the National Flood Insurance Program.  Sandra Parrillo, president and CEO of the Providence Mutual Fire Insurance Company in Rhode Island, warned that the NFIP would continue to be a burden on the taxpayers, and likely grow worse, if Congress failed to act.

Congress did act, bravely and in a rare display of bipartisanship.  Bravely because the reforms it adopted – and that President Barrack Obama signed into law – meant that some homeowners who for years had benefitted from artificially low, taxpayer subsidized insurance would have to pay rates that were actuarially appropriate to the flood risks they faced.  As for bipartisanship, it is hard to remember a time when so many members of Congress – 406 members of the House voting in favor and only 22 opposed – embraced a piece of legislation.

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Passage of H.R. 1309, known as the Biggert-Waters Act, remains remarkable for yet another reason.  In an era when federal spending far exceeds revenues, Congress not only reformed an important program but in doing so embraced a perfectly rational and sustainable approach to paying for it.

Yet today, some members of Congress are backpedalling.  Citing the opposition of constituents affected by the pending imposition of actuarially based flood insurance premiums, they want to delay by at least four years – until 2017 or later – the introduction of the new NFIP rates.

Thus, delay is both a bad idea and an unnecessary one.

As Parrillo testified more than two years ago, “The NFIP must begin charging risk-based rates if it is to have any chance of being a solvent program; these rates should reflect the true cost of providing coverage.  Any subsidies that the government believes are necessary must be independent of the NFIP and fully transparent.  Subsidies cannot continue to be hidden within the insurance mechanism, and homeowners should be fully aware of the real risks and costs of where they live.  American taxpayers should not be forced to subsidize a small sub-set of NFIP policyholders who continue to rebuild in high-risk areas.”

So, rather than put off the new flood insurance rates until after the next presidential election, NAMIC proposes that in those cases where homeowners face a legitimate hardship, the federal government could offer assistance through a means-tested and transparent program to make coverage more affordable to those who truly need it.  In this way, the program can still be strengthened the financially.

At the same time, Congress should embrace mitigation as a means of reducing the costs of floods and other natural catastrophes. Simple measures, such as enhanced building codes, have been shown in numerous studies to significantly reduce losses from extreme weather, with every $1 spent by government on mitigation saving $4 in losses.

In the long run, homeowners are better served by understanding the perils they face and accepting the responsibility they alone have for taking the necessary steps to protect themselves and their property from future damage.  Paying actuarially sound flood insurance rates, and using proven building fortification methods, are two key steps in the right direction.

Chamness is president and CEO of the National Association of Mutual Insurance Companies, the largest and most diverse property/casualty trade association in the country.