Insurers Stand to Expand Role in Federal Flood Program

  • Republicans and Democrats argee on parts of insurance overhaul
  • Flood insurance program needs congressional action this year

Democrats and Republicans, who have agreed on little this year, have found common ground on plans to give private insurers greater access to the $5 billion flood insurance program and to offer more buyouts for homeowners in areas likely to be repeatedly submerged.

"Flood insurance seems to be one of those few areas where Democrats and Republicans see the same problems and, in a lot of instances, see the same solutions," Rob Moore, a senior policy analyst with the National Resources Defense Council, said in an interview.

At issue is the National Flood Insurance Program, which is $25 billion in debt. Congress has until the end of September to reauthorize the federal program. If it doesn’t act the real estate market along coasts and rivers will come to a halt, because homeowners need that insurance to qualify for federally-backed mortgages. In the wake of Hurricane Sandy the program paid out $8.4 billion to help cover the costs of rebuilding.

On Thursday, Republican Congressman Sean Duffy of Wisconsin, chairman of the subcommittee that oversees the program, released draft legislation to overhaul it. Those changes overlap heavily with change House Democrats are seeking, according to a document from the Democrats on the House Financial Services Subcommittee on Housing & Insurance obtained by Bloomberg.

The bipartisan agreement among the House lawmakers covers a range of topics, including expanding the role of private flood insurers, getting the federal program to buy more reinsurance on the private market, and making it easier for homeowners that keep getting flooded to move somewhere else.

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"This shows an incredible amount of work," Roy Wright, the deputy associate administrator at FEMA who oversees the National Flood Insurance Program, said in an interview. He said the odds are good of Democrats and Republicans eventually reaching a deal.

The process has a long way to go before these changes would become law. Even if the House agrees on these reforms, the Senate and President Donald Trump must agree as well. And, as happened in the last flood insurance overhaul, changes may end up being rescinded after they become law if they cause premiums to skyrocket.

And some areas of disagreement remain among the House lawmakers. 

In the draft legislation released Thursday, Republicans propose ejecting from the program homeowners who keep getting flooded but don’t want to sell their houses. Democrats wouldn’t eject them. And Republicans would impose fewer conditions on private insurers who want to sell flood insurance.

Still the main areas of agreement between the parties is large. The "draft incorporates ideas from both Republicans and Democrats," Mark Bednar, Duffy’s spokesman, said in an email.

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Under these plans, insurers and reinsurers would see an increase in their potential market. The federal flood insurance program takes in about $3.5 billion in revenue each year, and covers about $1 trillion in risk. While private insurers can partner with the program, signing people up in return for a share of their premiums, few private insurers sell their own policies. The program recently bought reinsurance for the first time.

Expanding the space for private insurers could benefit Marsh & McLennan Cos. and Aon Plc, the largest insurance brokers by revenue in the U.S., according to data compiled by Bloomberg. Swiss Re AG, Munich Re and Transatlantic Reinsurance Co. have signed reinsurance agreements with the Federal Emergency Management Agency, which runs the program.

The changes could also reshape coastal neighborhoods. Both parties say they support more voluntary buyouts of homes that repeatedly flood. Under that approach, the federal government uses money that comes in through flood insurance policies to purchase high-risk homes, then demolishes them. Expanding those buyouts could shrink neighborhoods along the Atlantic and Gulf Coasts, in such places as New Jersey, Virginia, Florida and Louisiana.

Both parties also want the federal government to shield poorer households from rising flood-insurance premiums, by offering vouchers or other subsidies based on people’s incomes. They would increase the amount of money available to protect homes from flooding, such as moving buildings onto stilts.

"A fair amount of this will be part of the final legislation," Larry Larson, senior policy adviser for the Association of State Floodplain Managers, said by email after the Republican draft was released. Still, "it has a long way to go yet."

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