Taxpayers for Common Sense understands that H.R. 3370, the so-called “Homeowners Flood Insurance Affordability Act of 2014” will be voted on as early as today. Taxpayers for Common Sense strongly opposes H.R. 3370 because it irresponsibly attempts to deal with issues surrounding flood insurance rate increases by gutting key subsidy reforms from the Biggert-Waters Flood Insurance Reform Act of 2012. More than 400 members of the House of Representatives voted for that landmark reform legislation that was intended to help fix a broken federal flood insurance program, which was $17 billion in debt to the taxpayer at the time. After Superstorm Sandy, the program is now more than $24 billion in debt, and the congressional response has been to delay overdue reforms for years (S. 1926) or simply eliminate them as H.R. 3370 envisions. TCS urges you to oppose this legislation and support responsible changes that ease the impact of rate increases while protecting taxpayers.
The federal flood insurance program has been rife with subsidies – explicit and implicit – for decades. The 2012 reform attempted to reduce these subsidies by phasing-in rate increases as properties’ flood insurance rate maps are updated. The phase-in would be a yearly increase of 20 percent of the difference between the old rate and the full risk-based rate, reaching the new rate in five years. Previously, property rates were grandfathered at the risk level they were when they entered the program, despite changes on the ground that may have increased risk for these properties. In some cases these subsidies continued for decades. In addition, the reform bill required that risk-based rates be charged upon sale of a home. Both of these reforms would be eliminated under H.R 3370.
While the rate increases due to home sales (which took effect July 2012) and potential rate increases due to remapping (FEMA has indicated none of these rate increases would occur until late-2015 at the earliest) have created significant outcry from the policyholders affected, there are responsible ways to deal with their concerns. The most straightforward would be to slow down the rate increases and extend the glide path to risk-based rates. For example, Biggert-Waters mandated rate increases for second homes, business properties, and certain repetitive loss properties of 25 percent of the previous year’s rate. For policies facing significant increases, basing the increase on the previous rate instead of the difference between the old rate and risk-based rates would dramatically slow the rate of increase compared to Biggert-Waters.
In addition, by eliminating the provisions adjusting the rates for remapped properties, H.R. 3370 appears to force policyholders with less risk in the new maps to pay the higher rates from the old maps (instead of the reduced rates based on the new maps). As recently as 2010, FEMA has indicated that as many properties were being mapped out of the floodplain as were being mapped in.
Each year, FEMA adjusts rates across the various risk zones and base flood elevations to generate at least enough revenue to offset the average historical loss rate. Instead of allowing FEMA to severely discount large loss years such as 2005 and 2012, the 2012 reform bill mandated the average be a straightforward average of all years. In addition, rates in each risk zone were allowed to increase at no more than 20 percent per year. H.R. 3370 reduces this to between 5 and 18 percent. This change all but undoes that particular 2012 reform. An annual 5 percent increase is already mandated to generate revenue for a reserve fund to offset inevitable losses. And even before the 2012 reforms, FEMA was able to increase rates by 10 percent per year. Furthermore, the bill includes a provision that directs FEMA to “strive” to keep rates at less than one percent of the insured value and report on any rates in excess of this amount. This de facto cap of $3500 (the maximum home and contents can be insured is $350,000) removes any semblance of this being an insurance program.
Finally, the bill attempts to offset the cost of these changes with surcharges on all policyholders. While we appreciate – and support – paying for rate relief within this narrow program (5.5 million policies nationwide compared to 130 million housing units) rather than further burdening taxpayers, the fact that increased risk will not be matched by increased rates means that the program’s insolvency will occur years sooner, leading to an inevitable taxpayer bailout. The surcharges would be $25 for all policies except businesses and second homes, which would pay $250. Based on 2012 participation levels, this would generate roughly $585 million per year. It would also increase cross-subsidies where some policyholders are paying more than risk-based rates to offset subsidies for other policyholders.
Any changes to flood insurance reforms must be fair to not only policyholders but also the vast majority of taxpayers who are stuck with the tab for the program’s massive and growing debt. Artificially reducing rates doesn’t reduce risk. Highly discounting severe loss years does not make their costs disappear. Ignoring new maps doesn’t change the realities on the ground. Taxpayers for Common Sense urges you to reject H.R. 3370 and any efforts to arbitrarily delay rate increases. Instead, Congress should develop policy solutions that ease the impact on policyholders while protecting taxpayers.
Thank you for your consideration, if you have any questions please contact me or Steve Ellis at steve[at]taxpayer.net or 202-546-8500.
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