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FEMA calls for flood insurance expansion via private markets and NFIP

20th March 2017 - Author: Luke Gallin

Federal Emergency Management Agency (FEMA) official, Roy Wright, has underlined a need to expand flood insurance protection across the U.S., supported by the multi-year reauthorisation of the National Flood Insurance Program (NFIP) and growing interest for participation from insurers and reinsurers.

Addressing the U.S. Senate Committee on Banking, Housing, & Urban Affairs yesterday Roy Wright, Deputy Associate Administrator, Federal Insurance and Mitigation Administration, FEMA, called for the NFIP to be reauthorised before its expiration date of September 30th, 2017, on a multiyear basis.

The reauthorisation, says Wright, should not only be extended for multiple years, but should also “recognise the need to increase flood insurance coverage across the nation,” and “FEMA recognises that there is a growing interest by private insurers to offer flood insurance protection,” continued Wright.

The NFIP is currently in $24.6 billion of debt to U.S. taxpayers, and numerous experts and analysts have called for the program to be reformed, with Wright emphasising this, saying that ultimately the “premium paid for flood insurance must reflect the risk.”

Flooding continues to be the most frequent and costly natural disaster in the U.S. with huge damage potentials in all regions, but for a developed country flood insurance penetration remains less than desirable.

Federally-backed mortgage lenders in the U.S. must verify that properties in special flood hazard areas (SFHA) have flood insurance before approving a mortgage, and Wright says that a multiyear renewal of the NFIP would promote stability in the mortgage and housing markets in the states.

For various reasons a viable private flood insurance market has struggled to develop in the U.S., but greater participation from insurers and reinsurers has been evident in more recent times, and could help to expand flood protection across the country.

Wright said that according to estimates just one third of residential properties in SFHA have NFIP policies, highlighting an opportunity for the private markets to play a greater role and help to develop and expand the private U.S. flood insurance market.

FEMA supports greater participation from the private markets because an insured survivor “will recover more quickly and more fully,” said Wright, continuing to stress that it will take some time for the private market to adapt to a marketplace primarily served by a public program.

“Second, if the private market were to glean only the lower-risk policies, the NFIP would be left with all of the highest-risk policies. This could lower NFIP premium revenue while increasing potential claims payouts. Such actions would leave the program and taxpayers with even more financial risk,” said Wright, underlining a need for consultation and discussion surrounding the private market and the NFIP to avoid any unnecessary complications.

At the start of the year FEMA announced the expansion of its test 2016 reinsurance arrangement, transferring $1.042 billion of risk from the National Flood Insurance Program (NFIP), to 25 reinsurance carriers for a 2017 reinsurance program.

With Wright saying at the time FEMA will look to build on its “cornerstone” flood reinsurance placement in an effort to better protect the NFIP, while transferring more of its risk to the private sector.

Any additional flood risk finding its way into the private market will result in the need for increased reinsurance protection, and privatisation could actually help FEMA, the NFIP’s administrator, to reinsure more of the risk directly, as witnessed earlier this year.

“Through all of this, FEMA’s priority is to increase flood insurance coverage so that disaster survivors can recover more quickly and fully after flood events. Through a timely, multi-year reauthorization, Congress would enable FEMA to continue supporting those who take steps to protect their homes and businesses,” concluded Wright.

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