Flood Insurance Subsidies for Non-Primary Residences and National Flood Insurance Program Wind Coverage
January 24, 2008
Real Estate Finance Committee Federal Issues Committee
The following is for study only and has NOT been approved by the Real Estate Finance Committee or the Boardof Directors.
Issue:Should C.A.R., in conjunction with NAR, accept the end of federal subsidies for non-primary residences that were built pre-Flood Insurance Rate Maps (FIRM) and are required to have flood insurance? Should C.A.R., in conjunction with NAR support allowing the National Flood Insurance Program to offer coverage for wind?
Action:Action is requested by the committee at this time as theSenate is expected to address the issue of Flood Insurance prior to the end of 2008.
Options: 1. Take a “Support” position 2. Take an “Oppose” position 3. Take a “Neutral” position 4. Take a “Not Real Estate Related” position 5. Take separate positions on the two questions 6. Take no action
Background:Congress has been forced to deal with a bankrupt National Flood Insurance Program (NFIP) following the 2005 hurricane season. Claims from these hurricanes, expected to top $25 billion, exceed the total amount of claims paid in the history of the program and have made the program fiscally unsound. Because of this, both sides of the isle are looking at ways to make the program financially stable and self sufficient.
In the aftermath that followed the 2005 hurricanes, many home owners found their claims for wind damage being denied by private insurance companies. Their insurers claimed water was the damage, while home owners claimed it was the wind that drove the water to damage their home. This has create a “wind vs. water” problem for many home owners, and is being taken up in Congress.
Summary:The NFIP was created by Congress in 1968. The FIRM was developed to assess risk and determine insurance rates and premiums in the NFIP. Congress believed that, if the government was going to make purchasing flood insurance mandatory, there should be a way to “lessen the blow” to owners of properties built before the NFIP was created and before the development and implementation of the FIRM. These properties, known as pre-FIRM properties, receive a 35%-40% discount on their flood insurance premium. At the time, many in Congress believed that within a generation, these older at-risk homes would no longer be in existence and a new house would have been built to more protective standards.
Currently, only 25% ofproperties in the NFIP receive subsidies on their flood insurance premium. Vacation, second homes and rental properties comprise a smaller subset of this figure.
Outlook: On September 27, 2007, the House of Representatives passed H.R. 3121, to reform the NFIP. This bill will:
Phase out subsidies for non-primary residences and non-residential properties beginning in 2011,
Extend the NFIP for five years,
Increase coverage limits to $335,000 for residential properties and $670,000 for commercial properties,
Add coverage for business interruption,
Raisethe cap on annual premium increases to 15% from 10%, and
Allow for the purchase of wind insurance through the NFIP.
The Senate Committee on Banking, Housing, and Urban Affairs passed its own NFIP bill S. 2284 this past October. S. 2284 will also eliminate subsidies for non-primary residences and non-residential properties; however, the Senate bill will immediately eliminate the subsidy by raising premiums by 25% per year until an actuarial rate is achieved. Other differences are, S. 2285 will not: increase coverage limits, add coverage for business interruption, or allow for the purchase of wind insurance through the NFIP.
TheNFIP is set to expire on September 30, 2008, so it is anticipated that Congress will look to pass an NFIP reform bill before the end of the year and avoid another funding patch.
Cons:Many vacation markets—including those in California—will be impacted by removing these subsidies. The increase in insurance premiums will only add to the cost of housing and compound the shortage of affordable housing. Additionally, this may increase the difficulty of selling homes impacted by this change in markets that are already seeing market corrections or downturns.
Opponents of allowing the NFIP to cover wind damages claim it would open an already failing and bankrupt government program to even more liability. Additionally, it would create a government program that competes against the private market. Private insurance companies currently insure for wind damage and would now have to unfairly compete against the NFIP.
NAR Position: At the November 2007, business meetings NAR took the following policy:
1. That the NAR Statement of Policy on Disaster Prevention, Relief and Insurance be amended as follows:
The federal flood insurance program should continue to include subsidiescomprehensive coveragefor second homes, vacation homes and rental properties.Non-primary residences should be given the same consideration as primary residences.
Rational: At the November meetings, the NAR Land Use Committeeconsidered how the existing policy was adversely affecting NAR’s credibility to advocate on behalf of REALTORS® on a wide range of flood insurance issues. The Committee believed that the changes provided additional flexibility to staff to advocate on flood insurance issues without being tied to the negative connotations of supporting subsidies when the NFIP is more than 17.5 billion in debt. The Committee believed that existing language in the policyprovided sufficient direction to NAR staff to advocate on this issue to protect subsidies in the NFIP for primary residences, secondary and vacation homes, and commercial properties.
2. That NAR supports allowing the NationalFlood Insurance Program to offer coverage for wind.
Rational: NAR Committee members from the several coastal states reported that coverage for wind is becoming less available, more costly, or both. In addition, the Committee heard that there has been a problem with insurance companies not paying wind claims and arguing that damage was caused by water, not wind, thereby pushing off liability onto the NFIP and not fully compensating home owners for their losses. The Committee believed that this so-called “wind vs. water” problem would be solved by allowing the NFIP to offer wind coverage.
C.A.R. Position:C.A.R. doesnot currently have policy on these issues.
Should C.A.R., in conjunction with NAR, accept the end of federal subsidies for non-primary residences that were built pre-Flood Insurance Rate Maps (FIRM) and are required to haveflood insurance? Should C.A.R., in conjunction with NAR support allowing the National Flood Insurance Program to offer coverage for wind?