National Sep 20, 2017
The NFIP: What if?
President Trump signed into law a bill that provides funding for hurricane relief as well as raises the debt ceiling and keeps the government open for three months. The new law also reauthorizes the National Flood Insurance Program for a period of three months.
What this means to agents
A short-term extension is great news for agents because it prevents a lapse of the NFIP. A lapse would have been a worst-case scenario for producers. Simultaneously, this short-term reauthorization does not mean much for agents for several reasons. First and most obvious, is a short-term reauthorization by definition is a short-term fix. The program is now extended until Friday, Dec. 8, 2017, but past that date the future of the program is cloudy. The first long-term NFIP reauthorization bills were introduced into Congress as far back as March of 2017. Despite that, Congress still was unable to pass a long-term extension. So whether Congress can pass a long-term extension in the next three-months remains to be seen.
Second, this short-term extension of the program is a "clean" reauthorization. This means that the bill only extends the life of the programs and does not make any other changes. This makes an agent’s life easier as there are no rate increases or new fees to be worried about, but the problems inherent in the program like inaccurate flood maps and a growing debt still remain.
Ultimately, this short-term extension provides much needed stability to the NFIP policyholders during a time of unprecedented hurricane activity. However, Dec. 8 will be here before you know it and it remains a question of whether Congress will be able to agree to a long-term extension prior to that date. So let’s take a minute to discussion what are the likely scenarios that will play out with reauthorization between now and Dec. 8.
Long-term reauthorization: This is the goal, not only for the politicians but for the insurance industry. A long-term reauthorization provides stability which is crucial not only for the housing market but for producers to be able to speak with authority about the program to their clients.
If the program is reauthorized long-term what can we expect? It seems likely that a long-term NFIP bill will resemble some combination of bills that have originated in the House Financial Services Committee and the Senate Committee on Banking, Housing and Urban Affairs, the two committees with chief jurisdiction over insurance-related matters. Each committee has endorsed legislation that would reauthorize the program for a period of six years. Any more clues as to what reauthorization legislation will look like have to come from a combination of guesswork, past reauthorization efforts and heavy reliance on the more robust House Financial Services’ bill. For this discussion, let’s look at what is likely, what is uncertain and what is unlikely to appear in a reauthorization bill.
Likely: The inclusion of a cap on premium increases seems likely to be included in any reauthorization bill. First, the House Financial Services Committee bill contains such a provision. It would address consumer cost and affordability by lowering from 18 to 15 percent the cap on any individual policyholder’s annual rate increases and limiting the chargeable risk premium of any residential property to no more than $10,000. Further, the political backlash that occurred after the passage of The Biggert-Waters Act in 2012, a bill that set the NFIP on a path toward actuarially sound rates, was so extreme that Congress passed another bill just a few years later rolling back many of the reforms found in Biggert-Waters; included in that reform legislation was a cap on premiums.
It also seems likely that a long-term reauthorization would introduce measures to encourage private-market participation in the flood-insurance marketplace. This concept has been kicking around Congress for years and seems to enjoy bipartisan support. The House Financial Services Committee bill would ensure that private flood insurance can be used to satisfy the NFIP’s continuous-coverage requirement, an essential aspect of ensuring policyholders are not penalized for moving from one policy to another. The noncompete clauses that Write-Your-Own companies have to agree to also would be eliminated, allowing WYOs to sell their own private-flood insurance policies outside of the NFIP. While the Senate Commerce Committee bill does not contain a private-flood provision, it seems likely that one will be added when the bill goes before the committee for mark-up.
Toss-up: The NFIP is currently $25 billion in debt and some have projected that that figure could double due to Hurricanes Harvey, Irma and Maria. There have been several proposals over the past few years to erase this debt and allow the NFIP to start fresh. The argument is that the NFIP has incurred such a large debt—due in large part to Congressional mismanagement as well as several large storms (Katrina and Sandy) over the past decade—that it is impossible for the program to get back in the black absent debt relief. None of the debt-relief proposals have gotten much support and neither the House Financial Services Committee nor the Senate Commerce Committee bills contain any debt-relief provisions.
However, President Trump recently proposed forgiving $16 billion in NFIP debt in order to help the NFIP pay claims associated with the aforementioned hurricanes. This proposal, which has since been incorporated into a House of Representatives disaster relief bill, is in response to the NFIP reaching its borrowing authority with the U.S. Treasury. In order for the NFIP to pay claims Congress would be required to either increase the amount the NFIP can borrow or relieve some of its current debt.
While debt-relief is being considered now, there is no guarantee that the issue will find its way into a long-term reauthorization bill, especially as the memory of the devastation from these hurricanes begins to fade.
Unlikely: The NFIP is currently $25 billion in debt. There have been several proposals over the past few years to erase this debt and allow the NFIP to start fresh. The argument is that the NFIP has incurred such a large debt—due in large part to Congressional mismanagement as well as several large storms (Katrina and Sandy) over the past decade—that it is impossible for the program to get back in the black absent debt relief. None of the debt-relief proposals have gotten much support and neither the House Financial Services Committee nor the Senate Commerce Committee bills contain any debt-relief provisions. As such, it seems unlikely that the issue will find its way into a final long-term reauthorization bill.
Short-term reauthorization: While Congress has the foundation laid for a long-term extension, three months is not a long time. It is entirely possible that we see another short-term extension when Dec. 8 comes around.
So what does that mean exactly? Thankfully, we have history as a guide. From 2008-12 there were at least 14 short-term extensions of the NFIP. A short-term extension has both good and bad news. The good news is a short-term extension means status quo. Traditionally, short-term extensions have not made any significant changes to the NFIP. True to form, the short-term extension that passed the Senate was a "clean" extension, meaning it does not make any changes to the program. This means that as a producer you don’t need to worry about changes in premium caps or cuts in WYO compensation.
The bad news is that short-term extensions only kick the can down the road. Current pressing issues that face the NFIP, such as a lack of actuarially sound rates and mounting debt, are unlikely to be addressed in short-term fixes. Further, short-term extensions will create uncertainty in both the insurance and housing markets as the threat of a lapse of the NFIP is always only 60 or 90 days away.
Lapse: A lapse of the NFIP seems to be the worst-case scenario, but it is not uncharted territory. From 2008-12 there were five lapses in the NFIP, albeit short lapses. So what can we expect? This is perhaps obvious, but if the NFIP is not reauthorized, the program cannot write new policies. When lapses occurred in the past, the NFIP accepted incoming applications but did not take action on them until a short-term reauthorization was passed. At that time, the NFIP would issue a policy and then make them retroactive. Of course this creates issues, since in the past many lenders refused to accept NFIP applications that were pending as proof-of-insurance even if the promise of reauthorization was on the horizon. Lenders knew that the program had not been reauthorized and were not accepting FEMA flood coverage in some instances because they did not know what was going to happen. Essentially, the NFIP had not convinced the banking industry that the product was viable throughout their delayed process.
If this were to occur now, producers would be forced to find coverage in the private market. While the private market is more robust in 2017 than it has been in the past, it still only accounts for about 2 percent of the flood marketplace. This means that coverage may be limited or nonexistent, depending on the location of the risk.
While the short-term extension has given us clarity of what to expect from the NFIP, that clarity is short-term. It is becoming increasingly clear that the future of the NFIP is becoming increasingly murky and Congress has only until Dec. 8 to wade through the muck.