It is no secret that the National Flood Insurance Program (NFIP) is dramatically reducing its subsidies for commercial flood insurance. Political ramifications and public policy issues aside, if NFIP didn’t have the ability to borrow from the U.S. Treasury to pay claims, it could not exist as a commercial carrier. But what is next? What needs to be done? Is there a private market solution? What options are available?
Created by a Congressional act in 1968, NFIP is the principal flood market for residential and commercial insureds. Prior to Hurricanes Ivan, Katrina, Rita and Ike, NFIP took in more premium than it paid out in claims1, creating a surplus that was wiped out by the those storms. By 2012, the NFIP was $20.7 billion in debt. When Superstorm Sandy hit in October 2012, that figure surged to over $30 billion.2
These losses are only part of the story. Mandatory purchase requirements, statutory caps on premium increases, the legislative mandate of FEMA, lack of capital requirements or need to earn a profit, and subsidized premiums that do not reflect risk exposures have all contributed to NFIP’s instability and dysfunction as its deficit balloons.
According to FEMA, there is an estimated $3.3 billion in annual premium paid to NFIP. Certainly, this creates an incentive for the private sector and one of the largest growth opportunities in the property and casualty market today. Can the challenges causing NFIP’s problems be adequately addressed by the commercial market? A 2014 report released by the Government Accountability Office (GAO) indicated that private insurers are not likely to write flood insurance without reforms, including the ability to charge adequate risk-based premium.3
Historically, commercial insurers have provided limited flood insurance either as excess capacity attaching above NFIP limits or as sublimits within large sophisticated risk management programs. Wide scale participation has been hampered by the same core issues that have undermined NFIP. These issues underscore the differences between NFIP and the commercial market:
In their latest attempt to address some of these issues, Congress enacted the Biggert-Waters Flood Insurance Reform Act of 2012. While the Act was modified by the Homeowner Flood Insurance Affordability Act of 2014, those changes addressed personal lines and did not significantly affect the commercial market. Some of the key changes which have advanced the private commercial flood market include:
At AmWINS, we believe the privatization trend will continue and we are investing resources to provide our clients with competitive alternatives to NFIP, including dedicated in-house facilities. AmWINS’ property brokers are current on the latest market developments and are prepared to guide retail agents and brokers – and their insureds – through this often misunderstood line of coverage.
This article was authored by Harry Tucker, National Property Practice Leader with AmWINS Brokerage.
1 “Flood Insurance – Strategies for Increasing Private Sector Involvement”. GAO, January 22, 2014.
2 “The National Flood Insurance Program: Status and Remaining Issues for Congress Congressional Research Service”. February 6, 2013.
3 “Flood Insurance – Strategies for Increasing Private Sector Involvement”. GAO, January 22, 2014.
4 “The potential for flood insurance privatization in the U.S. Could carriers keep their heads above water?” Deloitte & Touche, 2014.
5 Author’s note: Pre-Flood Insurance Rate Map (FIRM) buildings are those built before the effective date of the first Flood Insurance Rate Map (FIRM) for a community. This means they were built before detailed flood hazard data and flood elevations were provided to the community and usually before the community enacted comprehensive regulations on floodplain regulation.
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