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Flood risk privatisation back on the U.S. political agenda

13th March 2017 - Author: Luke Gallin

The Housing and Insurance Subcommittee met recently to discuss the state of the U.S. National Flood Insurance Program (NFIP) and potential reforms, including the opportunity for the private sector to develop an effective private flood risk insurance market.

The development of a private flood risk insurance and reinsurance market in the U.S. has been persistently urged by numerous re/insurance industry experts and leaders, and also members of the U.S. Senate and U.S. Congress.

Established in 1968 and administered by FEMA the NFIP provides flood insurance to U.S. policyholders within qualifying communities. However, the NFIP has outstanding debt of $24.6 billion borrowed from taxpayers, of which the majority of households aren’t actually in the NFIP.

According to House Financial Services Committee Chairman, Jeb Hensarling, “the flood insurance program openly admits its current structure can never afford to repay.”

“As a result, the roughly 96 percent of all American households outside the NFIP are forced to subsidize the four percent in the NFIP, regardless of their income. That means a single mom working hard to put food on the table for her kids is forced to pay for insurance for some millionaire’s beachfront vacation home. If that’s not the definition of unfair, then I don’t know what is,” continued Hensarling, in a statement issued in January in response to the NFIP’s lending of a further $1.6 billion of taxpayer money.

Gallagher Re

The meeting of the Housing and Insurance Subcommittee and subsequent hearing, entitled ‘Flood Insurance Reform: FEMA’s Perspective,’ scheduled for 10am, March 9th 2017, offered an opportunity for the current program to be reviewed. This includes exploring how technological changes since the NFIP’s inception in 1968 could improve the program, and importantly, “how the private sector could develop a private flood insurance market that compliments the current NFIP model.”

“Reforming this unfair, unsustainable and bailout broke government monopoly will be a major focus for the House Financial Services Committee in 2017. We will pass legislation that begins the transition to a competitive, innovative and sustainable flood insurance market that gives consumers real choices,” continued Hensarling.

During the hearing Blaine Leutkemeyer, the U.S. Representative for Missouri’s 3rd congressional district, said currently the “taxpayers are the reinsurers of the NFIP,” urging FEMA to utilise more private market reinsurance protection.

Leutkemeyer stressed, “reinsurance is the most important thing we can do.”

It was explained by Roy Wright of FEMA, during the hearing, that 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.

One bill designed to help establish an effective and comprehensive flood insurance market in the U.S. was first introduced last year, called the Flood Insurance Market Parity and Modernization Act (FIPMA).

But despite the bill passing unanimously out of the House of Committee on Financial Services and the full House of Representatives, it failed to move past the Senate Committee on Banking, Housing, and Urban Affairs, which may have been to do with the busy end of year in the U.S. owing to the Presidential election.

However, in a move that has been praised by the American Insurance Association (AIA), U.S. Rep. Dennis A. Ross, Senior Deputy Majority Whip, who first introduced FIMPA, has announced the reintroduction of the bipartisan legislation.

“Floridians and Americans across the country would greatly benefit from more choices when it comes to flood insurance policies. More choices and increased marketplace ompetition means better coverage, more innovation, and more affordable policies for homeowners. This is especially beneficial to Floridians in central Florida and the Tampa Bay region who face threats of flooding from storms and hurricanes,” said Rep. Ross.

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.

With the exception of a very small, $1 million initial reinsurance purchase in September 2016, FEMA transferred $1.042 billion of NFIP risk to 25 reinsurers for a 2017 reinsurance programme, in an effort to better support the NFIP.

Rep. Caster, who will work closely with Rep. Ross on the legislation, added; “This bipartisan legislation is an important step towards a valuable alternative to the National Flood Insurance Program and relief from the flood insurance rate increases that threaten our hardworking families and businesses. In the previous Congress, Floridians led the way to a bipartisan flood insurance fix. We need to do it again for the long term to spare my Tampa Bay neighbors from any unreasonable flood insurance rate hikes.”

Welcoming the reintroduction of the FIMPA legislation, AIA’s Vice President for Federal Affairs, Tom Santos, said; “AIA welcomes the reintroduction of the Flood Insurance Market Parity and Modernization Act.  We are pleased to support this legislation clarifying an important provision from the Biggert-Waters Flood Insurance Reform Act of 2012 allowing private flood policies to meet the mandatory purchase requirement of the NFIP.  This clarification takes one step toward fostering a private flood insurance market, which will provide consumers additional options to insure against losses from flooding, and reduce taxpayer exposure.”

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