The Biggert-Waters Flood Insurance Reform Act, passed as part of 2012’s transportation bill, is an important step forward in fixing America’s beleaguered public flood insurance program. For nearly a half-century, taxpayers across the country have been implicitly subsidizing the National Flood Insurance Program (NFIP), which is now $25 billion in the red. The simple fact is that premiums collected aren’t sufficient to cover likely costs, and the program is not sustainable as it is currently structured.
In October, owners of about 9,000 repetitive-loss properties — those that have been significantly rebuilt more than once — began to see their subsidized rates rise gradually to levels recommended by actuaries, as did 87,000 business owners with NFIP policies. Rates on about 345,000 second homes began increasing earlier in the year, while the remaining 715,000 “subsidized” policyholders won’t see any significant change in their rates unless their properties are resold, significantly rebuilt or their policies lapse.
Separate from its provisions to phase out subsidies for older policies, the law also requires FEMA to complete its remapping project and update rates to reflect the real risk the properties face. Under this process, starting in late 2014, some homeowners will see their rates increase, while others will see decreases.
Homeowners in some flood zones, especially along the Gulf Coast, have blanched at the rises in their flood insurance rates. Aside from raising their houses, there is probably little these homeowners can do on their own to lower their flood rates.
But an unrelated part of the transportation bill — the RESTORE Act — can help reduce flood insurance rates for many homeowners along the Gulf Coast.
The RESTORE Act provides that 80 percent of the Clean Water Act fines paid pursuant to the 2010 Deepwater Horizon oil spill in the Gulf of Mexico go to fund environmental and economic projects along the Gulf Coast. States will take the lead in allocating the vast majority of these funds, which could top $14 billion.
Ecologically sound projects that increase resiliency against storm surges and flooding, such as rebuilding wetlands or shoring up barrier islands, are some of the best investments that states can make with their RESTORE Act windfalls.
For Louisiana, Hurricane Katrina crystallized the importance of healthy wetlands to protect inland cities. Simply put, as wetlands and barrier islands disappear, communities are effectively brought closer to the sea, rendering them more vulnerable to storms and flooding. The so-called “green infrastructure” of natural barriers can attenuate storm surges and reduce the power of hurricanes — potentially reducing the future costs of floods, and therefore the premiums homeowners face.
States can also use RESTORE Act funding to build traditional flood protection infrastructure like drainage canals and levees. The vast majority of flood protection infrastructure in the United States is operated by state and local governments, and it’s likely that this responsibility will increase in the future.
To be sure, residents in many Gulf Coast states complain — rightly so — about the unwillingness of the U.S. Army Corps of Engineers to certify locally operated levees and flood works. Strengthening existing infrastructure and bringing it up to compliance is a cost-effective and quick way for state and local governments to reduce future NFIP premiums for their communities, and a prudent use of RESTORE Act funds.
Perhaps the worst possible outcome would be to delay or repeal the Biggert-Waters reforms and allow the RESTORE Act to turn into a slush fund. For decades, cheap flood insurance has encouraged construction in coastal regions that are prone to flooding and reduced the incentive to mitigate against these risks. Biggert-Waters moves premiums in the direction of actuarial soundness, and the RESTORE Act provides funds for mitigation. In other words, NFIP reforms provide a significant incentive to use RESTORE Act funds wisely.
It’s a matter not just of economic efficiency but of fairness that insurance rates reflect decisions that people freely make. For far too long, the National Flood Insurance Program has encouraged both inefficiency and unfairness and put untold number of families in the way of inevitable natural disasters.
The RESTORE Act provides an opportunity to strengthen the economies and environments of the Gulf Coast states and, in the process, help homeowners reduce their flood insurance rates. The Biggert-Waters Act represents a step towards more sensible and sustainable flood insurance policy, and one that can work in tandem with the RESTORE Act.
R.J. Lehmann is a senior fellow and director of public affairs and Daniel M. Rothschild is a senior fellow and director of state projects at the R Street Institute, a free-market think tank.