We posted earlier that the U.S. House of the Representatives passed H.R. 1309 to reauthorize the National Flood Insurance Program (NFIP), which  extended phase-in of actuarial rates and delayed the full effect of levee de-accreditation decisions to allow communities to improve flood control structures. We also previously reported that the Senate has increasingly becoming more concerned about the Federal government’s exposure to natural disasters.  These concerns have now found a vehicle for their expression.

On September 8th, the Senate Banking and Finance Committee approved a bill to reauthorize the NFIP. While reports have focused on the committee’s solution of how to deal with  FEMA ‘s  $18 billion debt that it has incurred in the aftermath of Hurricane Katrina, the bill includes a section that mandates areas of “residual risk” (i.e., areas protected by levees, dams, and other flood control structures) to purchase flood insurance.  This mandate will have significant implications for communities, property owners, lenders, and investors in river and coastal communities. Currently, when FEMA issues a new flood rate insurance map or FIRM for a community protected by a levee, dam, or other flood control structure, the area which would have been located in a “special flood hazard area” is not mapped.   Both the House and Senate version would require some form of mapping of areas of residual risk but only the Senate bill would require residual risk areas to be included within a “special flood hazard area” and require the price of flood insurance policies in areas of residual risk to accurately reflect the level of flood protection provided, regardless of the certification status of the flood control structure.  Failure to purchase a flood insurance policy would render the property ineligible for federal programs and financial assistance, including loan guarantee programs.

Communities have invested billions of dollars on flood control structures in the last half century to not only mitigate the risk of catastrophic floods but also avoid the mandatory insurance requirements under the NFIP.  Recent  articles in the Philadelphia Inquirer and the New York Times articles have examined the issue of levee investment  in the context of the Susquehanna River flooding in Pennsylvania, contrasting communities that invested in strengthening their levees and communities that did not.  Section 107 would essentially prohibit participation in federal programs for property owners whose property is protected by a flood control structure but who elect not to purchase flood insurance.  Moreover, given the high cost of flood insurance, FEMA’s track record for flood control structure accreditation, and the Federal government’s encouragement of using catastrophe modelling to determine flood insurance rates, such a mandate would drastically alter private investment, development and lending decisions.

Several Senators are preparing to intervene with respect to Section 107 and the actuarial rate calculations contained in the Senate version before the bill goes to the floor.  Given the NFIP’s sunset deadline is September 30, 2011, it will be difficult for the Senate to pass this bill and then enter into a conference with members of the House to produce a final bill.  A more likely scenario is that the deadline for the NFIP is extended to allow for the legislative process to work toward a broader reform of the NFIP.

Here is a comparison with the H.R. 1309 prepared by the Property Casualty Insurers of America.

We will continue to bring you updates but let us know what you think of Section 107 in the comments.