TCS Testimony on the National Flood Insurance Program

TCS Testimony on the National Flood Insurance Program

Infrastructure,  | Quick Take
Mar 11, 2011  | 11 min read | Print Article

Today, Vice President Steve Ellis of Taxpayers for Common Sense testified on behalf of the SmarterSafer Coalition at a House Financial Services Subcommittee hearing on “Legislative Proposals to Reform the National Flood Insurance Program”.

Text of Taxpayers for Common Sense testimony can be found here, and a PDF of the testimony can be downloaded here.

Other panelists at the hearing include:

Orice Williams Brown, Managing Director, Government Accountability Office

Sally McConkey, Vice Chair, Association of State Flood Plain Managers and Manager, Coordinated Hazard Assessment and Mapping Program, Illinois State Water Survey

Terry Sullivan, Chair, Committee on Flood Insurance, National Association of REALTORS® and Owner, Sullivan Realty, Spokane, Washington;

Spencer Houldin, Chair, Government Affairs Committee, Independent Insurance Agents and Brokers of America and President, Ericson Insurance Services, Washington Depot, Connecticut;

Franklin Nutter, President, Reinsurance Association of America, Washington D.C.;

Sandra G. Parrillo, Chair, National Association of Mutual Insurance Companies and President and CEO of Providence Mutual Fire Insurance Company, Warwick, Rhode Island;

Donna Jallick, on behalf of the Property Casualty Insurers Association of America, and Vice President, Flood Operations, Harleysville Insurance, Harleysville, Pennsylvania;

Barry Rutenberg, First Vice Chairman, National Association of Home Builders, Washington D.C.

Interesting Numbers from Opening Remarks:

  • NFIP program insures 5+ million people, 20,000 communities.
  • According to a CBO report: There are currently 71,000 properties under the National Flood Insurance Program (NFIP) that are repetitive loss properties.  While these properties make up only 1.2% of the total number of properties under NFIP, they have accounted for 25% – 30% of NFIP payouts since 1978 – 2008.
  • The NFIP program has been on the Goverment Accountability Office (GAO) High Risk List since 2006 ( see 2011 GAO High Risk Report )  The program's current debt to the US Treasury is roughly $18 billion.
  • According to the GAO, 1 in 4 policy holders under NFIP do not pay the full risk rate. 
  • According to GAO testimony : The National Flood Insurance Act of 1968 authorizes NFIP to offer subsidized premiums to owners of certain properties. These subsidized premium rates, which represent about 40 to 45 percent of the cost of covering the full risk of flood damage to the properties, apply to about 22 percent of all NFIP policies. (At a cost to taxpayers of roughly $2 billion every year).
  • TCS has long criticized the use of subsidies as they encourage people to develop and live in high-flood risk areas (water fronts, beach fronts… etc.), with significant risk to the taxpayer if such areas experience a catastrophic loss.


1st Panel: Orice Williams Brown, Sally McConkey

Testimony of Steve Ellis
Vice President, Taxpayers for Common Sense

Subcommittee on Insurance, Housing and Community Opportunity
Committee on Financial Services
hearing on
“Legislative Proposals to Reform the National Flood Insurance Program”

March 11, 2011

Good morning, Chairman Biggert, Ranking Member Gutierrez, members of the subcommittee. I am Steve Ellis, Vice President of Taxpayers for Common Sense, a national non-partisan budget watchdog. Thank you for inviting me here today to testify.

Taxpayers for Common Sense has long advocated for reform of the National Flood Insurance Program. And with only $3 billion in annual revenues offsetting the $18 billion the program is in debt to the Treasury, all have recognized NFIP is fundamentally flawed and must be reformed. The question is how.

Any reauthorization of the National Flood Insurance Program must make significant changes to put it on sounder financial footing with more actuarially sound rates and accurate maps. The discussion draft of reform legislation being circulated by the committee is a good start. It responsibly tackles rate and subsidy issues, creates a mechanism to increase confidence and accuracy in flood mapping, and doesn’t stick taxpayers with the tab of bailing out a failed program. However, we are concerned with provisions that could inhibit adoption of updated maps, add a new business line to the program, and mandate annual coverage limit increases that will ensure the program’s liabilities actually increase each year. We look forward to making this good start an even better final product.

TCS is allied with, a coalition of free market, consumer, environmental, insurance industry and taxpayer groups in favor of environmentally responsible, fiscally sound approaches to natural catastrophe policy that promote public safety. The depth and breadth of the coalition – some of which are at this table – underscores the importance of reforming NFIP. I would like to submit for the record’s principles for reform. But to summarize quickly and clearly:

  • Flood Insurance Rate Maps should be accurate and up to date
  • Rates should be risk based
  • Any subsidies should be explicit, not hidden in the rates and targeted only to those who truly need them
  • Mitigation should be encouraged and is a tool to reduce risk
State Aid Principles Coalition Letter

Taxpayers for Common Sense strongly endorses those basic principles to better protect people, property, the environment, and the taxpayer.

I would now like to talk about flood Insurance and the draft legislation from the taxpayer perspective.

Unintended Consequences

NFIP does not charge truly actuarially sound rates. The program’s goal of fiscal solvency is defined as charging premiums that will generate enough revenue to cover a historical average loss year. That means catastrophic loss years are largely left out of the equation. The program covers any fiscal shortfalls by borrowing from the U.S. Treasury, which is a significant subsidy in itself, especially since the loans are virtually interest-free. The program contains enormous cross-subsidies as well.

The draft legislation provides a mechanism to move toward actuarial rates for many properties.

The graduated phase in of rates for newly mapped areas is responsible for both the homeowner and the program. The legislation also stipulates that subsidized commercial properties, second homes, newly purchased homes, substantially damaged or improved homes, and severe repetitive loss properties have their rates increased by 20 percent annually until they are paying the estimated risk premium rate. In addition the draft legislation directs that subsidies not be available to lapsed policies.

These changes move the program in the right direction. What appears to remain unchanged are subsidies to pre-FIRM and general repetitive loss properties that do not meet any of the specific criteria. It is not clear how many properties or the potential losses this represents, but it is an area that must be reformed. These properties have been subsidized for decades.

Accurate Maps Are Critical

The nation’s floodplains are dynamic, shifting from the impacts of development, weather patterns, and topographical changes. Flood maps must be up to date, accurate and based on the best available science.

We support the envisioned flood mapping advisory council to develop new standards for flood insurance rate maps that would incorporate true risk, be graduated and reflect realities on the ground – both man-made and natural. The direction that FEMA implement the new protocols is critical.

The council and the development of new mapping standards should not and will not delay ongoing FEMA map modernization efforts – that program is critical to the long term fiscal viability of the program.

We appreciate that unlike previous legislation, the bill does not automatically delay the implementation of new maps or slow walk rate increases. However, the draft legislation could delay or undercut new maps by giving the Administrator authority to suspend flood insurance purchase requirements for newly mapped special flood hazard areas. Insulating people from the changes related to the maps on paper does not change the geological realities – their property is at risk.

Don’t Make Matters Worse

There are some troubling program expansions in the draft. One is the creation of a new insurance product for business interruption or loss of use of personal residence. Another would enable coverage limits to annually increase by some inflationary measure . With the flood insurance program so heavily in debt it doesn’t make sense to expand the coverage provided.


TCS supports the privatization study called for in the legislation, and encourages FEMA to pursue the private-risk management initiatives. Also FEMA should be authorized to develop a catastrophic reserve.
Communities and individuals should be helped to reduce their flood vulnerability, including stronger standards for floodplain management and mitigation.

On balance, the draft legislation is a good step forward to reform the troubled flood insurance program. We look forward to working with the Committee and Congress to move the program in the right direction and off the backs of taxpayers.