Industry Groups: Privatize Flood Program

It’s unclear what the outcome will be of a December 9 meeting on the National Flood Insurance Program (NFIP), but stakeholders from at least two industry factions are on record stating they will ask for the program to be at least partially privatized. This latest round of discussions follows two years’ worth of wrangling and positioning on the topic by politicians and industry groups alike.

In an attempt seen by many as an effort to move discussions on the program off dead center, the Federal Emergency Management Agency (FEMA) held an NFIP public forum last week in Washington, where representatives from the Reinsurance Association of America and the Association of Bermuda Insurers and Reinsurers said in a statement that the program’s guiding principles should be protecting taxpayers.

“One of the ways to achieve that is to privatize the NFIP in whole or in part,” Frank Nutter and Bradley Kading says. “In this regard, the private reinsurers and capital markets have the capacity and interest in underwriting flood insurance risk.”

Nutter, president of the Reinsurance Association of America and Kading, president of the Association of Bermuda Insurers & Reinsurers, presented their statement, which qualified the request under certain circumstances, noting, “The private (re)insurance sector could assume the flood risk over time.” The unstated goal is to reduce the government’s level of involvement.

“An essential element of achieving that goal is that premiums for any continuing NFIP should be set at true risk rates based on sound underwriting including credible mapping, taking into consideration potential catastrophic loss,” said Nutter and Kading in their statement.

The validity of the NFIP has been under question for some time, as reported in Insurance Networking News, “Is the NFIP Doomed?”

On October 1, President Obama authorized another one-year extension for the program, which is under criticism for being unequipped to cover future catastrophe losses.  

As reported in INN, a 2008 report by the U.S. Government Accountability Office (GAO) concluded that the NFIP owes the U.S. Treasury $17 billion.  Proponents of the extension, including the American Insurance Association, have petitioned Congress in October to take the time to debate the more fundamental program reforms the group believes are needed.

Meanwhile at last week’s hearing, Nutter and Kading suggested that insurers be provided with incentives to assume NFIP policies. In addition, they suggested that either private sector flood coverage be exempt from state rate regulation, or that federal law should authorize file rating rules for flood risk coverage.