NFIP Limps Along

With the stroke of a pen on Saturday, President Obama signed a continuing resolution that bought the troubled National Flood Insurance Program (NFIP) another week of funding.

Nonetheless, the long-term prospects of the NFIP, some $17.8 billion in debt, remain in doubt. While the House has passed the Flood Insurance Reform Act of 2011, legislation that funds the program for 5 years while simultaneously reforming the program’s rate structure and mapping protocols, the Senate has only passed a six-month extension of the program that lacks any substantive reforms.

Against this backdrop, a new study from the Wharton Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania suggests that private insurers can play a bigger role in offering residential flood insurance. The study, done in conjunction with analytics firm CoreLogic, analyzed the likelihood of future catastrophic flooding and the potential cost of providing private flood insurance for two coastal counties in Texas.

Using probabilistic risk models, the analysis calculated the “actuarially fair” flood insurance premium for more than 300,000 residences in Galveston and Travis Counties, and then compared these rates to the rates currently charged by the NFIP. The Wharton analysis found a wide variance among the areas, with some paying premium rates too high and others expected to cover claims where rates were too low. For example, in Travis County’s moderate-risk flood zone the NFIP’s premium rates were on average nearly twice the rates indicated by the flood model data, while rates in the county’s low-risk flood zone rates were on average up to 16-times higher than those indicated by the model data.

Erwann Michel-Kerjan, Risk Center managing director and study co-author, says the results indicate that private insurers could potentially serve this market.

“This presents opportunities for private insurers to provide coverage in some of those areas, to complement the NFIP,” he said. “There are several practical barriers that would need to be addressed for private insurers to sell such coverage, but if done, this could significantly increase the number of residents with proper coverage, thus reducing the need for government disaster relief.”

Moreover, the report recommends greater efforts to mitigate flood damage, such as elevating houses in flood plains. For example, elevating a house by 2 feet will reduce expected losses by 40 to 50 percent on average, the study found. While the cost of elevating existing houses cannot be justified solely on economic grounds if the homeowner has to bear 100 percent of the cost, elevating new construction is much less costly, highlighting the importance of enforcing building codes in hazard-prone areas.