Congress Nears Five-Year Deal to Buoy Flood Program

Congress Closes on Flood Extension
Residents of Houma, Louisiana wade through floodwaters after Hurricane Rita. Congress is working toward a five-year reauthorization of the National Flood Insurance Program, which remains $17.8 billion in debt -- most of which was driven by hurricanes Katrina, Wilma and Rita in 2005. Photo: Kari Goodnough/Bloomberg

U.S. lawmakers may be nearing agreement on a long-term extension of the National Flood Insurance Program, giving hope to homebuilders, insurers and real estate firms that three years of uncertainty may be coming to a close.

The federal program, almost $18 billion in debt in the wake of 2005 hurricanes Katrina, Rita and Wilma, has been caught in a legislative tug-of-war between lawmakers in the House and Senate that has caused three lapses in the program in as many years.

The current House and Senate proposals, however, have attracted something otherwise in short supply in the current Congress: bipartisan support. A five-year reauthorization could clear the way for new home-building in flood-prone areas and generate new business for insurers and reinsurers including Swiss Re, Allstate Corp. and Travelers Cos.

“For the first time since the program expired, the House and the Senate are essentially on the same page,” said Eli Lehrer, a vice president at the Chicago-based Heartland institute, a research and education group that promotes free-market ideas. “On the big questions that have gummed things up in the past, the bills appear extremely likely to have the same things in them.”

Under the program, the government provides flood insurance -- mostly in partnership with insurance companies -- for homes and businesses in flood-prone regions. Policies in the riskiest areas are subsidized at less than actuarially sound levels.

The insurance, mortgage and building industries are lobbying hard for a long-term extension of the program, which insures 5.6 million policies with premiums in force of $3.4 billion.


Previous lapses have caused hardship for real estate agents, homebuyers and homebuilders like Beazer Homes USA Inc., KB Homes and Lennar Corp., which are already struggling with a moribund housing market. A lapse in 2010 resulted in the delay or cancellation of 47,000 home sales, according to a National Association of Realtors survey.

“Here we are in the worst economy in a long time and because of those gaps in the program a little over a year ago we were shutting down perfectly good real estate closings when we needed every one we could get our hands on for this economy,” said Senator David Vitter, a Louisiana Republican.

In the Democrat-controlled Senate, a draft measure gained swift approval from the Banking Committee this month with positive reviews from Republicans and Democrats alike. Notably, senators chose to drop a provision that would have written off the program’s $17.8 billion debt, something that has created problems with House Republicans who have been looking to raise the money to pay that debt down through changes to the program.

‘Right Direction’

“It’s a complicated bill, but I think we’re going in the right direction,” said Senator Richard Shelby of Alabama, the committee’s top Republican.

While awaiting Senate approval, the two chambers are working to finalize another short-term extension -- the 12th in the past three years. The current extension expires tomorrow; the new short-term extension would give lawmakers until Nov. 18 to reach a deal on the five-year renewal.

In the Republican-controlled House, the Financial Services Committee unanimously approved a bill offered by Representative Judy Biggert, an Illinois Republican. The House then passed it 406-22, in a vote Financial Services Committee Chairman Spencer Bachus pointed to in a recent interview as one of the foremost accomplishments of his 10-month tenure as chairman.

Bachus also said the House and Senate measures are “90 to 95 percent” similar.

Country ‘Underwater’

“This country is underwater, literally, not having a flood insurance bill,” said Bachus, whose state of Alabama was among regions devastated by Hurricane Katrina. “Having these short-term extensions is costing the economy, it’s costing jobs and it’s costing development.”

In addition to reauthorizing the program for five years, Biggert’s legislation would allow premiums to rise toward actuarially sound levels, link coverage limits to inflation and phase in coverage requirements for those who fall in newly designated flood zones. The bill would also establish a new system for handling flood-plain mapping.

The long-term extension may reduce costs for insurers in the NFIP’s Write Your Own program, which lets corporate partners write and service policies backed by the government, Donna Jallick, a vice president at Harleysville Insurance, said in congressional testimony in March. Jallick, representing the Property Casualty Insurers Association of America, said insurers have suffered from “significant liability and vulnerabilities” due to the lack of a long-term extension.

State Farm

A unit of State Farm Mutual Automobile Insurance Co., the largest U.S. home insurer, withdrew from its NFIP partnership in June 2010, citing the program’s instability. Allstate, the second-largest provider of home coverage, and Travelers still participate, according to FEMA’s website.

President Barack Obama, in a Sept. 19 proposal sent to Congress to pay for the administration’s jobs package, included a statement of support for Biggert’s legislation, specifically increasing premiums for different policy holders.

Obama and Biggert differed in what should be done with the additional $4.2 billion in revenue raised by the changes. Obama proposed the option of depositing the revenue in the government’s general fund, which would allow it to be used for the jobs program or to pay down the national debt. That idea swiftly drew Republican opposition.

No Offsets

“Financial Services Committee Republicans should welcome the Administration’s support for the House-passed reforms to the NFIP, but strenuously oppose any effort to divert new NFIP revenue to the General Fund to offset other spending,” committee staff said in a Sept. 20 memo obtained by Bloomberg News.

A few issues between the two chambers remain, particularly the final shape of the Senate version. Senator Roger Wicker, a Mississippi Republican, has secured the support of Shelby and Senate Banking chairman Tim Johnson of South Dakota to include language that would address wind damage -- an area of contention between the insurance industry and some lawmakers in the wake of the 2005 storms.

Wicker’s proposal, which is expected to be included when the measure is debated on the Senate floor, would create a system in the program for allocating losses between wind and water damage when properties are destroyed. The flood program covers damage from water but not wind, a distinction that Wicker and others have said is hard to make in the wake of a hurricane.


The House and Senate versions also differ in how much the Federal Emergency Management Agency should increase premiums per year, as well as in a House provision that would put a limit on the policies that can be directly administered by the program.

“Temporary funding considerations are always disruptive for the market,” said Cosette Simon, head of government affairs in the Americas at Swiss Re, the world’s second-largest reinsurer. “People know we have to have change here.”

The emerging deal stands to benefit reinsurers like Swiss Re and Munich Re that could regain a foothold in the market. Reinsurers, which write policies for insurance companies to help bear their risks, have been cut out of the market since the federal program began in 1968.

Included in the Senate bill is a provision that would require FEMA to conduct an assessment of the private reinsurance market’s capacity to assume a portion of the program’s insurance risk, as well as clarify that the agency is allowed to secure reinsurance from the private market.

“Swiss Re has an appetite” for reinsuring U.S. flood risk, said Andrew Castaldi, head of catastrophe perils for the Americas for Zurich-based Swiss Re. “There is more capacity in the insurance and reinsurance market than there was 40 years ago. It’s not really a solvency issue for many of the insurers or the reinsurers. It’s just a matter of getting comfortable with bringing it back to the private sector.”

(Corrects Sept. 29 story starting in 21st paragraph to indicate that Wicker proposal would apply only to federal program.)
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