How do you keep the sinking National Flood Insurance Program afloat? After 17 extensions, four expirations and 48 months of congressional tinkering, we're about to find out.
On July 6, President Barack Obama signed the Biggert-Waters Flood Insurance Reform Act of 2012, which not only extends NFIP for five years but ushers in a grab bag of long-awaited reforms designed to make the program truly self-sustaining for the first time in its 44-year history.
There have been tweaks before. In 1973, Congress made flood insurance mandatory for properties located in special flood zone hazard areas, or SFHAs. In 1982, it approved maps that excluded certain undeveloped coastal areas from NFIP coverage. In 1994, it developed the community rating system to encourage communities to better prepare for high water.
But Biggert-Waters cuts to the heart of NFIP's structural problems, flaws that became immediately apparent in 2005 when claims from hurricanes Katrina and Rita overwhelmed the program, leaving it $18 billion in debt to the U.S. Treasury.
For starters, Biggert-Waters phases out subsidies for 355,000 vacation and second homes, as well as properties with repetitive losses, excess baggage that the distressed program does not need. To ease that glide path, the act makes it easier for owners of the affected properties to apply for a FEMA buyout. It also streamlines wind-versus-water claims adjusting to prevent wind damage claims from being erroneously diverted from homeowners insurance coverage to NFIP.
To rebuild reserves, the act raises the annual cap on rate increases from 10 percent in 2011 to 20 percent and extends NFIP coverage to multifamily properties for the first time. Biggert-Waters also opens the door to a full-blown study into how NFIP might respond to business interruption and additional living expenses coverage claims.
And for the first time, the reform enables NFIP to transfer risk by purchasing reinsurance -- essentially insurance on insurance -- the way most property and casualty insurance companies do.
Biggert-Waters may not address all of the uncertainties that have attached themselves to NFIP, especially the estranged detente between the beleaguered program and the private insurance market. Perhaps finally being freed to think and act like an actual insurance company will help bridge that gap.
But the good news is, we're finally asking the right questions.
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