FEMA Administrator Craig Fugate Testifies Before U.S. Senate Banking, Housing and Urban Affairs Committee in Washington D.C. on National Flood Insurance Program Reauthorization

 

Federal Emergency Management Agency (“FEMA”) Administrator Craig Fugate testified today, June 9, 2011, on the reauthorization of the National Flood Insurance Program (“NFIP”) during a hearing before the United States Senate Banking, Housing and Urban Affairs Committee (“Committee”) in Washington D.C.

Various U.S. Senators also spoke on the subject, including Senators Tim Johnson, Committee Chair; Richard Shelby of Alabama; Jon Tester of Montana; Mississippi’s Roger Wicker; Mark Kirk of Illinois; David Vitter of Louisiana; New York’s Charles Schumer; and Tim Johnson of Montana.  The deadline to reauthorize the NFIP is September 30, 2011.

In his testimony, Mr. Fugate said the NFIP currently has $18 billion in debt, a sum that likely will be impossible to repay if the NFIP continues to operate as it has in the past, especially given the high risks associated with large-scale hurricanes or tsunami-type events.   Further, NFIP structural issues produce high vulnerabilities that are not addressed within the current system, he explained.

“How do we address this risk?  I think we agree it should be shared with the private sector versus strictly looking at a taxpayer-run system,” Mr. Fugate said, explaining that certain flood insurance policies could probably be moved to the private sector and incentives could be created to assist in this measure.   Many policies, however, will carry such high risk that the private sector will never be able to manage it, leaving the NFIP to find a way to do so.

Mr. Fugate also said that reauthorization periods need to be expanded because the short-term authorizations are proving detrimental to the industry and creating ancillary problems, such as making it difficult for real estate buyers to close transactions.

“I think stability is the one thing we heard loud and clear that we needed to address,” he said, adding that basing flood insurance rates on actuarial statistics is another change that needs to be made, as well as one that should encourage the private sector to enter the market and get more involved, he said. 

“I am not opposed to the private sector writing the least risky policies if that would increase the amount of protection people have,” Mr. Fugate added.  “But I also think when people find their risk has increased and they are required to buy flood insurance because they are in a higher risk area, the price of that often times becomes a detriment to people and a brand new cost they have not anticipated in their mortgages and their budgets.”

One limiting factor to achieving actuarial soundness is that the NFIP is currently held to a 10 percent annual rate increase, he explained.   Conversely, it is understood that many low-income policy holders are probably not able to pay higher premiums.

“It creates a double impact in that we may actually be forcing them to make hard decisions on how they are going to pay for their flood insurance,” he noted.

Producing new flood maps is also key to correctly pinpointing flood zones, and an area where significant improvements have been made, Mr. Fugate said.  The use of unbiased science and technology to produce flood map revisions has helped with dispute resolution when local or state data conflicts with that provided by FEMA, he said.

“Previously we never had an impartial way to deal with dispute resolution,” he pointed out.

Mr. Fugate concluded by saying, “We are probably focusing on a system that utilizes the federal program, but with a greater emphasis on the private sector, and how we do that.  We are looking at coming up with a more solid recommendation and coming up with a consensus report.”

During the hearing, Senator Shelby gave a brief history of the NFIP, relating that it was established in 1968 to reduce the burden on taxpayers by providing flood insurance to properties in high-risk areas, with the hope that the premiums could be used to cover claims.  But since Hurricane Katrina struck the Gulf Coast in August 2005, the NFIP has struggled to remain financially viable, Senator Shelby said.

“Today, the program is nearly $18 billion in debt and has problems even servicing that debt,” Senator Shelby said.  “Every aspect of the program must undergo significant revision for it to survive and continue on a sustainable path.”

Issues that need examination and investigation include the following:  

• The relationship between the NFIP and write-your-own insurance companies, which may be receiving excessively high reimbursements and bonuses from the program;
• The types of property being insured, in order to make sure resources are being effectively spent;
• The NFIP’s flood map modernization efforts, which are crucial for the long-term success of the program and for establishing fairly-priced premiums; and
• Ways to privatize aspects of NFIP, in order to better transfer risk from NFIP to the private sector.

Senator Wicker suggested his own program of action, which he dubbed, “The Coastal Act.”  It included the following three proposed reforms:

1.      Improve enforcement by FEMA and lenders with respect to those required to purchase flood insurance;

2.      Charge rates that are actuarially sound;

3.      Update FEMA’s flood insurance maps so applicable areas are aware of the risk.

“It’s been six years since Hurricane Katrina devastated the Gulf Coast, and while we have made significant progress in rebuilding our communities and businesses, for many Mississippians, recovery is still not complete.   One of the biggest impediments to our efforts is the lack of affordable  property insurance,” Senator Wicker said.  “The availability and affordability of wind insurance is crucial in any state where there is coastal exposure.”

Another substantial issue is that homeowners cannot purchase a single policy to cover windstorm and flood insurance.  Many Katrina victims had to go to court to determine which insurer was responsible for the damage caused by Katrina’s wind and water.

In Katrina, the NFIP did not designate which portion of damage was caused by water and which was caused by wind, thus creating a conflict of interest between itself and other insurers, he said.

Senator Wicker’s proposed Coastal Act would offer a formula that would utilize storm information provided by National Oceanic and Atmospheric Administration and its partners, combined with structural information from insured property for the purpose of allocating losses caused by high winds and storm surges from hurricanes.  The alternative loss allocation system would be based on the timing, location and magnitude of wind speeds, as well as the storm surge before, during, and after a major storm impacts the U.S. coastline, he explained.

Senator Schumer voiced concern about new flood insurance rates that were suddenly levied on homeowners whose homes are located in areas of Nassau County, New York, and which had never flooded, possibly because flood maps from another nearby county were mistakenly used to determine risk.

“I am asking for support to start a remapping process so we can get an accurate look at Nassau County,” Senator Schumer requested during the hearing.

Senator Kirk of Illinois asked that the NFIP reauthorization be scrapped completely.

“We have this policy of repetitive loss.  Is there any way we can not re-authorize this?” he said.

With no further business before the Committee, the meeting was adjourned.

 

 

 

 

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