Tucked into the Department of Homeland Security spending bill the Senate Appropriations Committee approved recently is a nefarious provision that will raise flood insurance rates for roughly 4.4 million Americans who already pay fair-market premiums, all to preserve subsidized rates for businesses and vacation homes in some of the country’s toniest zip codes.
Homeland Security Subcommittee Chair Mary Landrieu, D-La., inserted the one-year delay in the phase-out of subsidized rates for 345,000 second homes, 87,000 commercial properties and 9,000 homes with significant repetitive claims that have coverage from the National Flood Insurance Program (NFIP). These properties, which currently pay only about 40 to 45 percent of the premiums actuaries recommend as necessary, are set to see their rates increase by 25 percent a year until they reach the full actuarial rate.
The phase-out was overwhelmingly approved as one of the reforms to the insolvent NFIP in last year’s Biggert-Waters Act. For reasons largely of historical accident, properties that were insured by the NFIP prior to the introduction of flood insurance rate maps in the mid-1970s — as well as those in communities that have joined the NFIP in the intervening years — have been allowed to pay “grandfathered” rates that, in some cases, haven’t changed since 1969. As of the passage of Biggert-Waters, subsidized properties represented about one-fifth of the NFIP’s 5.5 million policies.
According to recent analysis by the U.S. Government Accountability Office, the NFIP has foregone $17 billion in premiums over the past decade as a direct result of these subsidized policies. Those funds would have gone a long way to paying down the program’s $27 billion debt to the U.S. Treasury, largely rung up in the wake of 2005’s Hurricane Katrina and last year’s Superstorm Sandy. In the absence of reform, there is no hope that bill will get any smaller; in fact, further subsidizing risk will increase the burden on taxpayers.
Despite overwhelming consensus the Biggert-Waters reforms were necessary, there is now a concerted effort by a number of Gulf Coast and Northeast lawmakers to preserve the subsidies by either delaying or overturning their phase-out. The strategy has included spreading scare stories of wildly inflated costs, claiming that policyholders will be made to pay as much as $30,000. Thankfully, FEMA has recently provided guidance in this area. For a typical property built at the base flood elevation (BFE) in a high-risk AE zone, a typical premium will be about $1,800 annually. A property elevated four feet above the BFE would generally pay closer to $500 a year.
Moreover, it is important to bear in mind that flood insurance subsidies flow disproportionately to the wealthy. Even after the Biggert-Waters reforms are implemented, GAO estimates there will be 715,000 properties paying grandfathered rates, almost entirely primary residences in high-risk zones. About 79 percent of these properties are in counties that rank among the top 30 percent in median home value and 65 percent are in counties that rank among the top 30 percent of median household income. By comparison, just 9 percent are in counties that rank among the bottom 30 percent in income and less than 1 percent are in the bottom 30 percent in home value.
It is the owners of vacation homes and businesses in these disproportionately wealthy counties who stand to gain the most from delaying the phase in of risk-based rates. But in order to maintain legislated premium revenue neutrality, the bill would require that everyone else — that is, those millions of policyholders who are already paying risk-based rates — pay more to make up those lost premium dollars. In addition to being patently unfair, this perpetuates the program’s biggest flaw: that it subsidizes risky behavior by charging the less risky.
Flood insurance reform is long overdue. All Congress needs to do now is step out of the way and let it happen.
R.J. Lehmann is senior fellow with the R Street Institute, a Washington, D.C.-based non-profit committed to free markets and responsible environmental stewardship. Steve Ellis is vice president of Taxpayers for Common Sense.
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