With the National Flood Insurance Program (NFIP) hours away from expiring, House and Senate lawmakers have approved a bipartisan measure – H.R. 5860, the Continuing Appropriations Act, 2024 and Other Extensions Act – to continue funding the NFIP for an additional 45 days through mid-November.
The NFIP’s last multi-year reauthorization expired on September 30, 2017, and since then, the NFIP has been extended 22 times (23 times as of today) and allowed to lapse briefly three times.
Administered by FEMA, the NFIP is offered to the public through a network of more than 50 insurance companies and NFIP Direct.
Flooding can happen anywhere, and studies have shown that just one inch of floodwater can cause up to $25,000 in damage. Most homeowners’ insurance policies do not cover flood damage, and flood insurance is a separate policy that can cover buildings, contents, or both.
The NFIP provides flood insurance to property owners, renters, and businesses, and this coverage helps them recover more quickly when floodwaters recede. The NFIP works with communities, which are required to adopt and enforce floodplain management regulations that help mitigate the effects of flooding. Flood insurance is currently available to anyone who lives in one of the nearly 23,000 participating NFIP communities. Homes and businesses in high-risk flood zones with mortgages from government-backed lenders are required to purchase flood insurance.
“The National Association of Home Builders (NAHB) commends the House for acting in a bipartisan manner to pass H.R. 5860, legislation that will fund the federal government and the National Flood Insurance Program (NFIP) for an additional 45 days,” said Alicia Huey, chairman of NAHB and a custom home builder and developer from Birmingham, Alabama. “NAHB has worked tirelessly with lawmakers to make them aware that even a short-term disruption to the flood insurance program would force delays – and in some cases, cancellations – of home sales and multifamily transactions that require federal flood insurance under the NFIP.”
“Closings are going to stop” in flood-prone areas, said James W. Tobin III, CEO of the NAHB. “It’s going to have some lasting effects and really put a lot of real estate transactions on hold for a while.”
The U.S. Government Accountability Office (GAO) recently issued a report on the NFIP that examined several objectives, including the actuarial soundness of Risk Rating 2.0, how premiums are changing, efforts to address policyholder affordability, options for addressing the debt, and implications for the private market.
To analyse the data, GAO reviewed FEMA documentation and analysed information from the NFIP, the Census Bureau, and private flood insurance companies. GAO also interviewed FEMA officials, actuarial organizations, private flood insurers, and insurance agent associations.
As of 1 April 2023, FEMA fully implemented NFIP’s pricing methodology, called Risk Rating 2.0. The methodology leverages industry best practices and technology to enable FEMA to provide rates that are actuarily sound, fair, easier to understand, and more reflective of a property’s flood risk.
The implementation of Risk Rating 2.0 has aligned premiums with risk, but affordability concerns accompany the premium increases. FEMA had been increasing premiums for several years prior to the implementation of Risk Rating 2.0. By December 2022, the median annual premium was $689, but this would need to increase to $1,288 to reach full risk. Under Risk Rating 2.0, around a third of policyholders are already paying full risk premiums. Many of these policyholders have seen their premiums reduced with the introduction of Risk Rating 2.0. All others will face higher premiums, including 9% who will ultimately face increases of more than 300%. The Gulf Coast states are reporting the largest premium increases, as policies in these states have been among the most underpriced despite having some of the highest flood risks.
“We recommended that Congress consider creating a means-tested assistance program that’s reflected in the federal budget,” the GAO said in its findings. “Risk Rating 2.0 does not yet appear to have significantly changed conditions in the private flood insurance market, as NFIP premiums remain generally lower than what a private insurer would need to charge to be profitable. In addition, certain programme rules continue to inhibit the growth of the private market. In particular, NFIP policyholders are discouraged from seeking private coverage because they are required by law to maintain continuous coverage with the NFIP to have access to discounted premiums, and they do not receive refunds for early cancellations if they switch to a private policy. By authorising FEMA to allow private coverage to satisfy NFIP’s continuous coverage requirements and to offer risk-based partial refunds for mid-term cancellations that are replaced by private policies, Congress could encourage the growth of the private market and help expand consumer options.”
NAHB has been at the forefront of working with lawmakers to find a solution that does not allow the NFIP to expire. The extension of the NFIP is an important victory for NAHB and members of the housing industry who rely on this program to provide certainty and predictability for the flood protection and mitigation strategies for which it was designed.
Prior to the extension, NAHB sent a letter to Congress urging them to continue this vital program for America’s homebuyers.
“What the housing market needs right now is stability and certainty. Uncertainty over whether the NFIP will lapse, coupled with the growing possibility of a government shutdown, could have a significant negative economic impact on home builders, home buyers, multifamily developers and renters,” the NAHB letter stated. “To that end, we urge Congress to consider the impact of a government shutdown on federal programs that directly support the construction of new housing, help buyers or renters access housing, or provide federal permits that may be required for construction.”
