November 15, 2012

Rep. Earl Blumenauer, a Democrat representing Oregon’s 3rd Congressional District, has been at the forefront of efforts to reform the National Flood Insurance Program (NFIP) and other aspects of federal disaster relief. Blumenauer co-sponsored the Flood Insurance Reform Act of 2004, which principally aimed at addressing the problem of repetitive losses caused by a small number of properties with greater exposure than the great majority of risks insured by the program. As Blumenauer relates, the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012 has further moved the NFIP in the right direction, but the program remains severely troubled, as Hurricane Sandy’s impact has only underscored.

Earl Blumengauer
U.S. Rep. Earl Blumenauer, Oregon (D)

Insurance & Technology: What do you think Hurricane Sandy should teach us about the NFIP and about the role of government, federal and state, in disaster recovery?

Rep. Earl Blumenauer: We get these lessons periodically. We had a big one with Hurricane Katrina, which is still sinking in because we really haven’t put the Flood Insurance Program back on stable financial footing — it hasn’t recovered from that devastation seven years ago. And the lessons about how and where we rebuild. Extreme weather events appear to be more the norm —we’re seeing acceleration in terms of drought, flood, storm. Though not quite as severe as Katrina, Sandy impacted a much larger and more heavily populated area that just happened to include one of the world’s most centrally located and important cities. I’m hopeful that in this case, because it was concentrated in a business, communications and cultural center, that more people will be aware and think about these implications.

I&T: What do you see as the proper rationale or mission of a federal flood Insurance program, and how do you think the way the program has been run may have departed from that mission?

EB: Over 50 years ago the federal government embarked upon a program of flood insurance protection because it was clear that the private sector was unable to provide an affordable flood insurance product on a scale necessary to meet the national need. This has helped in some regards. It has encouraged people to step up. It has helped minimize some of the pressure on the federal government for storm and disaster relief while providing more adequate and timely opportunities for property owners to recover.

Over the course of a half-century however, we’ve watched more and more development occur in storm-prone areas. We’ve never really kept the program actuarially sound. Indeed, the rates for millions of people are less than would be necessary to keep the program self-supporting. And then we’ve had devastating events, such as Hurricane Katrina and Sandy that completely deplete reserves and put the program heavily in the hole. Now there’s a $20 billion borrowing authority that will be exhausted before a fraction of the Sandy storm damages are met.

I&T: And what are we expecting to see in the way of flood-related losses from Sandy? A New York Times article quoting you cited $7 billion.

EB: That may well be on the lower end, but it’s clearly going to be more than twice the much as the borrowing limit for the fund. And we’re not through the fiscal year! There will be other disasters.

I&T: Is, and should the NFIP be, essentially a combination of subsidy and insurance? You said that it hasn’t been kept actuarially sound. Could it ever be?

EB: Well, it could be — that’s within our capacity. As a practical matter, you don’t turn on a dime on something like this that involves over 5.7 million policyholders. As a practical matter, in order to make the program work actuarially, meet the needs of future and minimize pressure on the federal government to throw more money at it, we should fully map the areas that are at risk now, based on what we know. And that will include more property than is now covered. I think you’ll find that there are more properties that should be part of the program in updated maps. We ought to make sure that anybody who gets a federally subsidized loan doesn’t just have flood insurance but keeps the flood insurance policy in force.

There is a part of what passed in the legislation that was tacked onto the transportation extension is a requirement to move these up. But we need to be more rigorous in terms of making sure that everyone is there and that it happens sooner rather than later. We also need to combine this with more aggressive federal participation with state and local governments. We ought to just put down a marker to the effect that, in order for people to get maximum disaster relief the state and local governments need to have modern, strong building codes and zoning in place. And, you know, we don’t want to be a big national zoning board — we don’t want to micromanage — but if it doesn’t meet standards, then they shouldn’t get full coverage. They should be on their own. There should be responsibility for people who are in harm’s way and stay in harm’s way.

I&T: Do you see a role for technology in more precisely underwriting flood risk, administering policies and improving the cost profile of the NFIP? Are geo-spatial technologies and Big Data-related technologies, such as catastrophe modeling helping?

EB: Putting science to work in terms of calibration, greater ability to understanding what’s happening in a geotechnical sense, using technology for more precise mapping. I am confident that if we funded this effort appropriately, that there are ways to make it more precise, happen quicker, and be able to update it. These things change with time — there are adjustments because we learn more: there are changes in terms of hydrology and climate.

I&T: Is there a role for the insurance industry in helping to monitor loss patterns and refine our understanding of the structural requirements that inform building codes?

EB: Absolutely. The real estate industry, the financial industry — all of these have a key role and an interest in making [the NFIP] stable and predictable, helping people to assume responsibility and be safer over time. Nobody benefits from loss and chaos.

I&T: I can see a need for some kind of disaster recovery funded by the government, whether federal, state or a combination of both. If private insurance won’t cover this, doesn’t it tell us that we do have to subsidize it?

EB: No, those are separate issues: coverage versus subsidization. Part of the problem with the private market is that they have to make a profit. And a private insurance company going in could have significant risk in a limited area and not have the base to support it. The federal government, with a national program, is better equipped to withstand the year-in, year-out vagaries. Being national in scope by definition, the federal government is better positioned to assume a national risk that would potentially wipe out an individual private insurance company or two — with just one storm event. Separate from the scope of the coverage is what people pay for it. And just because the federal government is the insurer or last resort and better equipped to spread the risk and absorb the loss does not mean that it needs to do so at a loss — that it can and should set rates that are designed over 20 years, or some appropriate period, to be self supporting.

I think the federal government should provide the coverage; I understand why no private company wants to take that risk, but it’s not clear to me why the fed government should do that and heavily subsidize it.

I also want to be clear: there are other natural hazards and disasters that are looming out there. The federal government is called upon in the aftermath of wildfires, earthquakes, flooding, as well as hurricanes and tornadoes. The same proposition applies here: state governments, local governments and private property owners need to assume responsibilities for those as well. There needs to be a requirement and follow through by state and local governments to deal with seismic upgrades. The Portland [Oregon] school district just approved the largest bond measure in the state’s history in part to deal with seismic upgrades for buildings that will not be safe in a seismic event. That’s expensive, but Oregon voters are doing it.

I think that the federal policies need to encourage state and local governments, private developers and property owners to be responsible. They shouldn’t put housing in the middle of forest fire-prone areas and expect that they’re going to get city-level fire protection — or if the inevitable fire comes that somehow they’re going to be put back into the flame zone. Earthquakes, floods, mudslides in Southern California — these events show that these principles need to be adopted widely.

I&T: You and your congressional colleagues introduced reforms in 2004. How have those reforms improved the NFIP, and what still needs to be done?

EB: It has pointed the way toward the future. The pilot program that we put in place for buyouts and relocation have produced significant savings for those areas that took advantage of it, and part of the Act earlier this fall helped bring that to scale and streamline it. The principles have been verified: in areas of repetitive flood loss, we don’t just use money to put people in the same place in vulnerable structures — you flood-proof or you move. But it hasn’t been imposed on a widespread basis yet. So the principles in the legislation were sound. The extent to which they have been implemented, they are tested and true, but it needs to come to scale.

I&T: In talking about the need to address problems with the NFIP, is there a danger of appearing callous in the face of great suffering?

EB: Absolutely. There’s no good time to do this. If it’s in the aftermath of some disaster, when people are paying attention, the message of “How do we fix this so that it’s better in the long term?” is not as welcome. This happened during Katrina. This happens all the time. I get calls every time there’s a wildfire all the time in Southern California or whenever there’s a flood, because I’ve been doing these disaster things forever. But there’s always a danger. Our first instinct is to help those who’ve suffered loss, and their first instinct is, “I’m going to rebuild!” And you hear it all the time: “I want to go into the Lower 9th Ward in New Orleans,” or, “I want to go back to this barrier island that I just got washed away from — I’m not going to be defeated!”

So there are these two instincts, one addressing that people having just suffered loss, and then instinct that we’re not going to be defeated. That happens all the time. And then as we get into it, there are the inclinations of people in state and local government — and to a certain extent the federal government — to try to make people whole again, and so we have situations time and time again where people are back in harm’s way.

We’re not doing people any favors. I can show you example after example to demonstrate that people who are determined that they are going to be in harm’s way repeatedly aren’t just risking themselves: they put their family at risk, as well as every emergency provider who has to go rescue somebody who refused to evacuate. Somebody who decided that they’re going to be in the path of a flood or wildfire puts the emergency responder at risk.

ABOUT THE AUTHOR
Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek ...