Overhaul of Fed Flood Insurance Program To Mean Higher Premiums

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Congress took a first step last week to raising the premiums for millions of homeowners insured by the national flood insurance plan. The goal is to fill a massive hole in the federally subsidized program that is currently underwater to the tune of $21 billion due to the massive hurricanes of the past two years.

A bill approved by the Senate Banking Committee would phase out federal subsidies for millions of properties and raise premiums for any residents covered under the program by as much as 15% a year.

"We are not here to address a Katrina problem, a regional problem or even a new problem. We are here to address a national problem created by the operation of a poorly designed program," said Senate Banking Committee Chairman Richard Shelby (R-AL). "Today, roughly 25% of the structures within the program still receive an explicit subsidy. The persistence of these subsidies is one of the greatest reasons why the flood insurance program is insolvent. Beyond the explicit subsidies, the fiscal integrity of the program suffers because all of the properties of the program receive an implicit subsidy. Given that the flood insurance rate maps are considerably out of date and often highly inaccurate. For example, it was determined after Katrina that the maps were off by as much as 15 feet in certain areas."

The bill approved by the Banking Committee would phase out subsidies on a vast array of properties, including businesses, second and vacation homes, residential properties that have had repetitive losses and those that have incurred damages that exceed the fair market value of the property. Several senators also indicated they will move to eliminate subsidies for all homes over a certain market value when the bill is voted by the full senate.

The bill would also expand those residential properties that are required to obtain flood insurance to include those behind levees or dams.

It would also allow the Federal Emergency Management Agency (FEMA), which administers the flood program, to increase premiums by 15% a year, as opposed to the current cap of 10% and increase premiums for those properties for which the subsidy is phased out by 25% a year.

The bill will also require a council comprised of representatives of FEMA, the Army Corps of Engineers, Department of Interior and others to create new maps expanding the 100-year flood plain, which will require many more properties to obtain mandatory flood insurance.

For credit unions and other lenders the bill would mean more borrowers would need to obtain flood insurance before a mortgage is approved. The borrowers must enforce the flood insurance requirement at risk of financial penalties that the bill would raise from the current $350 per incident to $1,000 per incident.

FEMA has already paid out a record $23 billion in flood claims for the 2005 hurricane season and is still as much as $21 billion short of expected claims. And authorities are still struggling to fund an equivalent amount of flood claims for uninsured properties in New Orleans and elsewhere in the Gulf.

"The next 15 months will also be critical to determine if FEMA is up to the task of administering this program, or if this program should be reorganized into another federal agency," said Shelby.

Since 1978, the flood insurance program has grown from 1.4 million policyholders and $50 billion in risk exposure to 5 million policyholders and almost $900 billion in risk exposure.

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