Builders Call for Sensible Flood Insurance Reforms From Congress

Testifying before the Senate Banking Committee on Feb. 2, NAHB President David Pressly told lawmakers that the nation’s home builders support efforts to reform the National Flood Insurance Program (NFIP) to ensure its long-term financial stability, but cautioned that any legislative proposals should not be an overreaction to unusual circumstances stemming from last year’s devastating hurricane season.

“The NFIP is not simply about flood insurance premiums and payouts, but is rather a comprehensive program that guides future development and mitigates against future loss,” said Pressly. “While a financially stable NFIP is in all of our interests, the steps that Congress takes to achieve this aim have the potential to greatly impact housing affordability and the ability of local communities to exercise control over their growth and development.”

To improve the solvency of the program and its attractiveness to potential policyholders, NAHB supports the following reforms to allow the Federal Emergency Management Agency (FEMA) and the NFIP to better adapt to changes in the marketplace:

• Provide FEMA the authority to allow for slightly higher annual premium increases to allow the agency to reduce its indebtedness to the federal Treasury.
• Increase coverage limits to better reflect today’s home values.
• Create more insurance options to allow policyholders greater flexibility and provide additional home owner benefits while aiding program solvency.
• Raise the minimum deductible for paid claims in order to provide a strong incentive for owners to protect their homes, and thereby reduce potential future losses to the NFIP.
• Update and modernize the Flood Insurance Rate maps to eliminate large discrepancies between what was mapped as the 100-year floodplain decades ago and what the 100-year floodplain is today. The term “100-year floodplain” refers to an area that has a 1% chance of suffering a catastrophic flood in a given year.

Pressly said that NAHB would oppose any effort to statutorily change the current 100-year floodplain standard to a 500-year floodplain standard as a way to require more home owners to participate in the NFIP and buttress the program against greater losses.

“At a minimum, FEMA should conduct a study of the feasibility and implications of such a change in the NFIP’s mandatory purchase requirements prior to enacting any modifications,” said Pressly, who noted that a shift to a 500-year floodplain standard would greatly expand the program’s reach by forcing millions of additional property owners to purchase flood insurance.

“What would this mean?” he asked. “Would this impose burdensome requirements on areas unlikely to suffer floods? Would it unnecessarily harm home buyers and increase the cost of homeownership? Would it harm home values? And how would such a change impact every coastal community — and many inland areas — in the U.S.?”

Likewise, Pressly told lawmakers that before Congress considers mandating flood insurance for home owners who reside behind flood control structures such as dams or levees, FEMA must produce adequate documentation indicating that the benefits of such compulsory coverage outweigh the costs.

Citing significantly higher construction costs and their accompanying impact on housing affordability, NAHB opposes expanding residential design standards beyond current law. “For example, on the Gulf Coast, elevating new structures could add, on average, $30,000 to the cost of a new home,” said Pressly.

Flood insurance claims for the 2005 hurricane season are expected to top $23 billion as a result of the unprecedented damages caused last year by Hurricanes Katrina, Rita and Wilma, far exceeding the total amount paid out over the NFIP’s 37-year existence.

Congress approved legislation last November to raise the borrowing authority of FEMA to $18.5 billion annually from the Treasury, and the NFIP will need at least $5 billion more to meet its obligation to claim holders.

Established in 1968, the NFIP offers affordable flood insurance to home owners and businesses in floodplains and other low-lying areas that otherwise might not be able to obtain such coverage.

More than 20,000 communities nationwide participate in the NFIP and the program currently covers approximately 4.8 million policyholders.