Senator Bill Cassidy (R-LA) released “The Flood Insurance Crisis: A Comprehensive Breakdown on Rising Flood Insurance Premiums.”  Click here to read the full report and here to read the one-pager.  In his accompanying press release, Sen. Cassidy affirmed that, “We must understand the problem to properly diagnose it and address it.  This report clearly lays out why flood insurance premiums are out of control, but also why there is reason to hope.”

The Cassidy report cites CSFI’s white paper, “An Evaluation of Risk Rating 2.0 on Impacts NFIP Affordability.”  You may review our white paper in full here and the executive summary here.  While some recommended actions have been addressed since our paper’s release, such as FEMA’s release of full-risk rates, many recommendations remain relevant and urgent.

In his concluding remarks, Sen. Cassidy outlines three recommended actions for FEMA: “If FEMA wishes to repair its relationship with stakeholders, it should consider the following steps: (1) balancing affordability considerations with other concerns in its methodology, (2) sharing Risk Rating 2.0’s actuarial information for greater transparency, and (3) reevaluating and reintroducing Risk Rating 2.0 under the rulemaking procedures set by the APA.  While not a panacea, such steps would ease the misgivings that have developed after the introduction of Risk Rating 2.0 and would help rebuild the working relationship needed for NFIP to succeed.”

Cassidy’s report provides a comprehensive overview and an analysis of the NFIP, demonstrating historical background and the current state of the program.  Some of Sen. Cassidy’s many findings include:

• While the cost of a full-risk premium represents less than 2% of the median household income for most states, it exceeds that threshold for ten states.
  • Similarly, the full-risk premiums represent more than 3% of the household income of black homeowners, higher than the proportion of household income for other ethnic groups
• Even though FEMA is required to “assess the need to revise and update all floodplain areas and flood risk zones” every five years, they are updated less frequently in reality. Because FEMA does not have a uniform system of monitoring changes in topography, the pace of updates has varied with disparate results. Most FIRMs are estimated to be between fifteen and twenty years old, with some last updated in the 1980s. Since the implementation of Risk Rating 2.0, the use of flood zones for calculating premiums has discontinued although flood maps are still used for floodplain management purposes, namely in identifying flood zones. However, there is evidence suggesting that the problems of using FIRMs for pricing purposes extend to identifying flood zones. Case in point, the inconsistency surrounding FIRMs could explain why a relatively high percentage of NFIP claims have originated from areas not originally designated as SFHAs.
  • In a study conducted by Freddie Mac, the property values of coastal homes located in an SFHA were subject to a 4.3% discount compared to “an equivalent home” not in a coastal area. Interestingly, such discount did not apply to other coastal properties outside of SFHAs.
• The absence of an express Congressional mandate raises a serious question of whether FEMA was actually authorized to implement Risk Rating 2.0. FEMA would argue that it has broad authority to set rates under the Flood Act and that the rate hikes under Risk Rating 2.0 are within the statutory limits.  However, Risk Rating 2.0 is an overhaul of NFIP that goes far beyond setting premiums. An interpretation that the discretion to set rates is the same as the authority to revamp an entire program is a generous reading, to say the least. The question as to whether Risk Rating 2.0 was properly authorized becomes more compelling in light of the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo (“Loper Bright”). In the past, an agency’s interpretation would have been entitled to deference so long as the interpretation was “based on a permissible construction of the statute.” However, this deferential standard of review was overturned under Loper Bright. The Court reasoned that although an agency might have expertise on a specific subject matter, it has “no special competence” in parsing through statutory text. On that basis, it does not make sense to delegate interpretive authority to those agencies.
  • FEMA has kept the actuarial analysis behind Risk Rating 2.0 close to its chest, leaving policyholders in the dark on how their policies are being calculated. In a break with tradition, FEMA has declined to release analyses and other details that one might expect pursuant to the Administrative Procedure Act (the “APA”). Agencies are generally required under the APA to publish notices of all proposed rulemaking activities in the Federal Register to give the public a chance to comment and provide its own data and arguments relating to the proposed rules. FEMA has so far refused to comply to the rulemaking procedures set under the APA.
• Transparency issues also hinder the construction of mitigation efforts as policyholders lack guidance on how different measures reduce premiums. Before Risk Rating 2.0, insurance tables could readily be translated to determine the most effective mitigation projects, which prompted stakeholders to “devise solutions to reduce flood insurance cost and flood risk.” However, policyholders are less incentivized to take on new mitigation projects if they are unsure how they will lower premiums or if they will do so at all.
  • The OFIA reached the same conclusion in its report—the lack of clarity prevents homeowners from knowing how “to reduce their flood risk” and local officials from deciding on the best “mitigation funding opportunities.”
  • In a study by the National Institute of Building Sciences, flood mitigation measures have been found to be effective – $11.5 billion in “federally funded flood mitigation” activities resulted in $82 billion in benefits, including $53 billion in potential property losses that were averted.

CSFI appreciates Sen. Cassidy’s continued alliance with our coalition and his team’s work in developing this report.