NAMIC Envisions NFIP Reform

While opinions on how to fix them vary, nobody would dispute that the problems surrounding the National Flood Insurance Program (NFIP) are legion.

In comments submitted to the Federal Emergency Management Agency (FEMA), which oversees the NFIP, the National Association of Mutual Insurance Cos. (NAMIC) offered it take on the how to mend the cash-strapped program.

Among NAMIC suggested solutions is finding a lasting fix for the NFIP’s finances. Because the program has been funded by a series of temporary extensions, it often lapsed creating havoc for insurers and consumers alike.  “Repeated short-term reauthorization creates uncertainty and can lead to lapses in the program as we saw in 2010,” the letter states.  “During these lapses, companies were not permitted to write new policies, issue increased coverage on existing policies, or issue renewal policies.  The NFIP should be reauthorized for an extended time period in order to give more stability to the program and consumers.”

Bluntly, NAMIC says part of this effort to stabilize the NFIP should be forgiving the nearly $20 billion dollars in debt the program currently has on its books. “In order to retain long-term solvency the debt must be forgiven,” the letter states. “Currently, the NFIP pays approximately $900 million a year to the Treasury in the form of interest payments. Without eliminating the debt, the future of the program is in jeopardy.” 

Another, perhaps more politically palatable suggestion is to force the program to charge actuarially sound rates. Critics have longed charged that the subsidized rates charged by the NFIP creates moral hazard and incentivizes development in flood-prone areas. NAMIC says going forward the actual price that is charged for flood coverage must reflect the actual risk. “The separation of rates from the actual costs of living in a flood-prone area represents the biggest problem with the program today.  The rates charged for flood coverage should be actuarially sound in order to get the program on solid footing.” 

NAMIC’s roadmap stands in contrast to recent comments by Frank Nutter, president of the Reinsurance Association of America. Nutter advocated privatizing the NFIP to in order to relieve American taxpayers the cost of funding the NFIP. “On a number of levels, there is a strong case to be made for privatizing the NFIP,” Nutter said at a FEMA forum. “Private (re)insurers and capital markets have the capacity and interest in underwriting flood insurance risk, and that has real upside for the American taxpayers who ultimately bear the costs of the current program.”

In its letter, NAMIC countered that privatization in unlikely to work due to adverse selection. “Simply put, only those people that are at risk for flooding will purchase flood insurance, making it virtually impossible to pool risk among a large enough population for a viable and affordable insurance product.  In order to underwrite a risk like this, an insurer would need to charge very high premiums and maintain significant capital reserves in case of massive flooding, when all of their policyholders would be making claims.”