Should FEMA Have to Use the Actual Replacement Cost of a Property When Calculating Flood Insurance Premiums? (H.R. 2565)

What is H.R. 2565?

(Updated October 5, 2019)

This bill would require the Federal Emergency Management Agency (FEMA) to use the actual replacement cost value of a property when determining premiums for flood insurance under the National Flood Insurance Program (NFIP), rather than using a national average replacement cost calculation. In effect, this means that lower-income policyholders subsidize wealthier homeowners whose properties are valued above the national average.

The bill would also require FEMA to conduct a study to evaluate insurance industry best practices for risk rating and classification, including practices related to replacement cost value in premium rate estimation. FEMA would transition to using actual replacement cost value one year after the bill’s enactment, and its implementation would be phased in geographically between that time December 31, 2020.

Argument in favor

FEMA’s current formula for determining flood insurance premiums uses a national average replacement cost rather than the property’s actual cost, meaning that lower-income policyholders overpay and higher-income policyholders underpay. This bill would fix that by requiring FEMA to use the property’s actual replacement cost.

Argument opposed

There are issues with the way that FEMA is calculating flood insurance premiums and the issue needs to be studied to see if there’s a way to fix that inequity, but this bill would make too big of a change to soon to flood insurance markets and could make it harder to afford coverage.

Impact

Flood insurance policyholders; and FEMA.

Cost of H.R. 2565

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Rep. Blaine Luetkemeyer (R-MO) introduced this bill to require FEMA to use the actual replacement cost of a property when determining flood insurance premiums:

“The current National Flood Insurance Program (NFIP) fails to do what private insurance policies do: price for risk. Instead, the NFIP relies on a pricing system in which policyholders in less expensive homes subsidize those in more expensive ones. Insurance policies from private carriers take into account for pricing and underwriting purposes the cost to completely replace a structure. The Federal Emergency Management Agency (FEMA) uses an average replacement cost calculation instead of a property-specific one. My legislation would ensure that FEMA would use a property-by-property approach when it comes to pricing for premiums, helping to end the subsidization by everyday Missourians of America’s wealthier homeowners. This legislation is the next step in getting the federal government to adhere to policies and procedures that have been in place in the private sector for decades.”

House Democrats opposed this bill in committee while acknowledging that “policyholders with properties below the average value may be overpaying for flood insurance” and that policyholders above the average are underpaying, which they believe merits further study. They explained their caution in the bill’s committee report:

“Given the broader affordability challenges associated with flood insurance premiums, we must be cautious in calling for changes that could have unintended consequences on flood insurance costs. If flood insurance becomes widely unaffordable, this could have devastating consequences on the housing market as policyholders lose the ability to purchase coverage, and are left unprotected in the event of a flood.”

This legislation passed the House Financial Services Committee on a party-line 34-25 vote.

Media:

• Sponsoring Rep. Blaine Luetkemeyer (R-MO) Press Release
  
• House Financial Services Committee Press Release