No issue demonstrates the complex interrelation between the insurance industry and the government as vividly the National Flood Insurance Program.

Established by National Flood Insurance Act of 1968, the NFIP is administered by the Federal Emergency Management Agency (FEMA) and currently covers some 5.6 million Americans. Over the past three years the program has struggled, lapsing three times and limping along with temporary extensions. With the one-year extension signed last year by President Obama set to expire at the end of September, lawmakers are once again struggling to craft a lasting fix to the cash-strapped program.

H.R.1309, the Flood Insurance Reform Act of 2011 is a five-year extension of the program is currently under consideration by the House Committee on Financial Services. Sponsored Judy Biggert (R – IL), the bill enjoys bi-partisan support and seeks to address some of the programs most pressing issues by phasing in higher premiums and creating a Technical Mapping Advisory Council to help provide more accurate maps of flood plains. Nonetheless, the bill’s fate in the House and beyond is an open question.

“I don’t think it’s going to be completely smooth sailing in the House but I do think we will get the bill out in some form,” says Ben McKay, SVP of federal government relations for the Property Casualty Insurers Association of America. “However, if the troubles from last year are instructive, a five year extension may not acceptable to the Senate.”

Likewise, Jimi Grande, SVP, Federal and Political Affairs for the National Association of Mutual Insurance Cos, questions whether the Senate would even take up a bill before the NFIP’s funding expires at the end of September. “The House has done everything it can to get it started early,” he says. “I wish I could tell you I was more optimistic that the Senate was going to act.”

While the bill’s uncertain fate in the Senate is largely due to the glacial pace at which the Upper Chamber takes up legislation, there is also simmering ideological resentment to the NFIP among proponents of limited government. Opponents of the NFIP argue that the program should be privatized and contend that by subsidizing artificially low insurance premiums the NFIP disincentives homeowners to avoid or mitigate flood risk. “There are a few Senators who don’t like the idea of a flood insurance program at all,” Grande acknowledges.

Indeed, in this era of newfound fiscal rectitude, the financial situation surrounding the NFIP is especially burdensome. The program is estimated to be approximately $17.5 billion in debt, expenses largely incurred in the wake of hurricanes Katrina and Rita. With the NFIP paying interests on its debt to the U.S. Treasury, many argue that its debt must be forgiven in order for the program to retain long-term solvency.

While H.R.1309 does mention the need for actuarially sound rates, it does not address the NFIP’s long term debt. This may be a political liability, McKay predicts. “The conservative caucus has put holds on bills in past. Their view is that any bill that does not address the programs long term debt should not be a long-term bill.”

Moreover, while “actuarially sound” rates may appeal to actuaries, they may not be politically viable. Some studies indicate that rates would at least twice as high as they are today to even help the program get anywhere near to breaking even.  After years of paying artificially suppressed rates for flood insurance, homeowners would likely impart an earful to their congressional representatives if forced to suddenly find coverage in the private market. “Somebody paying premiums in a flood plain that hasn’t flooded in 80 years is not going to stand for rate increases,” McKay says. “Quadruple their monthly payment and congressional phones will start ringing.”

McKay got a sense of this indignation first hand in April when he discussed the NFIP on C-Span’s Washington Journal in April. “Having spent 40 minutes on the air answering caller questions, I can tell you that folks are not happy with the premiums they are paying now,” he says. “If they do privatize the NFIP, I won’t be going on any more call in shows again.”

Bill Kenealy is a senior editor with Insurance Networking News.

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