Obama Extends Federal Flood Insurance Program, OK’s Use of Private Reinsurers

On July 6, 2012, President Obama signed the Biggert-Waters Flood Insurance Reform Act of 2012 extending the National Flood Insurance Program’s authority through September 30, 2017. The law extends the National Flood Insurance Program (NFIP) for five years and makes reforms to the program.

It also calls for reforms including the phasing out of subsidies for many properties, raising the cap on annual premium increases from 10 to 20 percent, allowing multifamily properties to purchase NFIP policies, imposing minimum deductibles for flood claims, requiring the NFIP administrator to develop a plan for repaying the debt incurred from Hurricane Katrina, and establishing a technical mapping advisory council to deal with map modernization issues.

The new law also requires the Government Accountability Office (GAO) to conduct a study on the prospect of adding business interruption and additional living expenses coverages to the NFIP and would require the Federal Insurance Office (FIO) to study and submit a report to Congress on natural disaster insurance issues and possible legislative solutions.

The reforms call on the GAO to examine and report on the options available in seeking to privatize the program within the next 18 months but immediately give the go ahead to the NFIP to purchase reinsurance coverage from the private market instead of borrowing from the U.S. Treasury. This authority to purchase reinsurance from the private market is conditioned on the approval of the Administrator of the rates and terms of the reinsurance. The Act provides that such rates and terms must be reasonable and appropriate and be an amount appropriate to ensure the Program’s ability to pay claims.

It is expected that the move toward privatization will result in actuarially sound rates to enable policyholders and the community to adjust to risk-based premiums.

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