Legislative Update: California and the National Flood Insurance Act of 1968

Rumor has it that a California legislator is considering introducing legislation in 2018 to investigate the idea of the state having its own flood insurance program.  This appears to be in response to research from late last year out of the University of California, Davis, concluding that California should consider leaving the National Flood Insurance Program (NFIP), a federal program established by the National Flood Insurance Act of 1968.

According to the Report of the Senate Committee on Banking and Currency, which accompanied Senate Bill No. 3497 of 1968, the Flood Insurance Act sought to provide a national program:

. . . to occupants of flood prone areas through the cooperative efforts of the Federal Government and the private insurance industry.  The program would be administered by the Department of Housing and Urban Development. …

. . .

Heavy losses over the years from hurricanes in the coastal areas and from storms in inland areas of the Nation dramatize the lack of insurance protection against flood damage.  Insurance protection against the risk of destruction caused by tornadoes and other natural catastrophes is generally available, but it is not available against the risk of flood loss.

Communities along the seacoast or in a river basin become completely immobilized following a major flood.  Usually, they must depend on the Federal Government and voluntary relief agencies to provide various forms of assistance.  Some State and local governments have limited programs to assist a flood-stricken area, but disaster relief from all of these sources is inadequate to provide for the necessary restoration of heavily damaged areas.  These facts underline the need for a program which will make insurance against flood damage available, encourage persons to become aware of the risk of occupying the flood plains, and reduce the mounting Federal expenditures for disaster relief assistance.

In promoting the Act of 1968, Senator Sparkman noted, as found in the Congressional Record:

The facilities of the private insurance industry would be fully utilized in carrying out the program.  Private insurance companies could either assume a portion of the risk in carrying out the program or could participate on a nonrisk basis.  Risk sharing companies would commit risk capital to an industry pool of companies which would absorb a share of the losses and expenses of the program.  The Federal Government would make premium equalization payments to the pool to cover losses and also would provide reinsurance coverage to the pool for excessively high losses.  Insurance companies in the pool would pay a premium to the Government for this reinsurance coverage in years of low-flood losses.  Other nonrisk-bearing insurance companies would participate in the program as fiscal agents of the pool.

That was then.  Nicholas Pinter, a UC Davis professor and associate director of the Center for Watershed Studies, led his 20-year study (from 1994 to 2014) which determined that California flood insurance policyholders received only 14 percent in claims paid of the total premiums paid (only 9 percent in the flood-prone Central Valley).  This placed California in the 9th worst ranking in terms of payouts, in comparison to Mississippi, which received 560 percent of premiums and Louisiana’s 382 percent. This then caused the researchers to investigate different options with the thought that California could get a better deal if flood insurance was done at the state level.

The study recommended that “California should explore a state flood insurance program, with savings invested in long-term risk reduction” and provided the following with regard to its conclusion:

Current federal law requires that home and business owners with federally-backed mortgages must carry flood insurance.  However, this mandatory insurance need not be through NFIP.  In the past 2-3 years, more private insurers have selectively offered flood coverage.  There is broad interest in privatization of flood insurance, including pending federal legislation (HR 2901 and S 1679), but concern exists from floodplain and flood-risk experts that privatization will reduce FEMA funding for floodplain mapping and mitigation activities.  Perhaps more concerning is that private insurers will “cherry pick” flood policies now overpriced by NFIP and leave the NFIP as the insurer-of-last-resort, holding only grandfathered, repetitive-loss, and other “actuarial dogs” imposed by legislative mandate.  This outcome would overwhelm NFIP with unsustainable debt.

Rather than relying on privatization to solve its flood-insurance inequities, California should move quickly to stake its place in this arena.  This recommendation was earlier made by California’s Department of Water Resources in 2005: “Examine existing flood insurance requirements and consider the creation of a ‘California Flood Insurance Fund,’ … to compensate property owners for flood damage” (DWR, 2005).  California should consider acting before private interests make state action untenable.  Interesting public-private solutions are possible, such as partnering with private reinsurers to hedge the risk from low-probability, high-magnitude catastrophic floods.  Many services funded by NFIP, such as flood-hazard modeling and mapping, are being done across California using tools half-a-century ahead of FEMA-funded contractors.  California also leads the country in implementing flood mitigation measures, like bypass channels and levee setbacks, that simultaneously reduce flood risk for surrounding areas, enhance riparian and wetland habitats, promote agriculture, provide recreation, and support groundwater recharge.  In implementing its own flood insurance program, California would be in a position to address many of the shortcomings of NFIP, remedying important issues like repetitive-loss properties, residual risk behind levees, and sovereign liability for flood damages.

California is in a position to do what it does best – not follow the nation, but lead.  The state has the expertise, and the need, to set new precedents in sustainable flood-risk management.

The federal bills mentioned in the above study did not succeed, and the U.S Senate rejected even more recent private flood insurance reform in the way of S. 563/H.R. 1422 in September of 2017.  However, the CA Department of Water Resources released its 2017 update to the Central Valley Flood Protection Plan which recommended establishing a state run flood insurance program by 2027.  This may have prompted the murmurings of legislation that we are now hearing.  We will wait to see if anything materializes in the next few months.

Legislative Intent Service, Inc., can research legislative history materials on any California bill, even new legislation such as the one mentioned above proposing to explore a state-run flood insurance program, once it is introduced.  Some clients have asked us to research bills in their infancy and to send them materials on a rolling basis as soon as new information is made available.  We can do that for you too!