H.R. 5740 (112^th): National Flood Insurance Program Extension Act

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Library of Congress Summary

The summary below was written by the Congressional Research Service, which is a nonpartisan division of the Library of Congress.

House Republican Conference Summary

The summary below was written by the House Republican Conference, which is the caucus of Republicans in the House of Representatives.

This summary can be found at http://www.gop.gov/bill/112/2/hr5740.

Background

In 1968, Congress created the National Flood Insurance Program (NFIP) to address the nation’s flood exposure and the need to alleviate taxpayers’ responsibility for flood losses paid out in the form of post-disaster relief following annual flooding and severe flooding following hurricanes.  At the time, Congress recognized that the inherent challenges of managing flood risk were too great for the private sector and that no viable private sector insurance alternative existed.  The Flood Disaster Protection Act of 1973 established a mandatory flood insurance purchase requirement for structures located in identified Special Flood Hazard Areas. 

Under the 1973 Act, federally regulated lenders were obligated to require flood insurance on any mortgage issued or guaranteed by the federal government in a designated SFHA in a participating community.  By 1994, lax enforcement of the mandatory purchase requirements led Congress to require lenders to purchase coverage on behalf of—and bill premiums to—mortgagees who failed to purchase coverage on their own (called ‘‘forced placed insurance’’).  Since 1994, lenders who fail to enforce the mandatory purchase requirement have been subject to civil penalties. 

Eligible homeowners, renters, and business owners purchase coverage under the program either directly from the NFIP or, more often, from private insurers that voluntarily participate in the Write Your Own (WYO) program.  WYO insurers take responsibility for policy administration and claims processing but assume no financial risk in settling claims.  As of 2010, there are approximately 5.6 million residential and commercial policyholders under the NFIP.

The NFIP is administered by the Federal Emergency Management Agency (FEMA), which is housed in the Department of Homeland Security.  The NFIP reduces future flood losses through: (i) flood hazard identification; (ii) floodplain management (e.g., land use controls and building codes); and (iii) insurance protection.  The NFIP generated premium income of approximately $3.3 billion in 2010.  The 2005 hurricane season resulted in significant claims which the program’s annual premium income could not cover.  To pay the claims, the NFIP borrowed from the U.S. Treasury.  Prior to 2005, the NFIP’s borrowing authority had been limited by statute to $1.5 billion. Congress made up for the shortfall by increasing the program’s borrowing authority three times between September 2005 and January 2007 (from $1.5 billion to $20.8 billion).  The NFIP currently owes $17.775 billion to the U.S. Treasury. 

Since 2006, the Government Accountability Office (GAO) has identified the NFIP as ‘‘high-risk’’ because of inadequate management and insufficient funds.

Summary

H.R. 5740 would reauthorize the National Flood Insurance Program (NFIP) through June 30, 2012, and amends the National Flood Insurance Act.  

The bill would amend the Flood Disaster Protection Act of 1973 to allow for private flood insurance to satisfy mandatory purchase requirements under the Act.

The bill would also direct the Comptroller General and the Federal Emergency Management Agency (FEMA) to provide Congress separate reports on a broad range of options, methods, and strategies for privatizing the national flood insurance program with recommendations for the best manner to accomplish such privatization.

Additionally, the bill would authorize the FEMA Administrator to pursue certain private risk-management initiatives such as assessing the capacity of the private reinsurance, capital, and financial markets by seeking proposals to assume a portion of the program’s insurance risk.

Lastly, the bill would direct the Comptroller General and the FEMA to provide Congress to conduct separate studies to assess options, methods, and strategies for offering voluntary community-based flood insurance policy options and incorporating such options into the national flood insurance program.

The provisions in this extension were also included in H.R. 1309, which passed the House on July 12, 2011, by a vote of 406-22.

Cost

There was no Congressional Budget Office (CBO) cost estimate available for this legislation.  

House Democratic Caucus Summary

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