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Private Sector Role in National Flood Insurance Program Reform

Shawn Homand - Chief Underwriting Officer - Global Property, Ironshore

The National Flood Insurance Program is set to expire September, 30, 2017.  As such, there has been widespread interest from policymakers, insurers and reinsurers for private sector participation to support the future viability of the NFIP.  Private insurance companies are eager to garner a share of the $3.4 billion in premium that the NFIP wrote in 2015. However, they are only interested in writing risks at actuarially sound rates.

More than 80 primary insurers now participate in the NFIP Write Your Own (WYO) program. The WYO Program allows participating private insurance companies to write and service the NFIP insurance policy under their respective company names. The companies receive an expense allowance for policies written and claims processed while the federal government retains responsibility for underwriting losses.

The goals of the WYO Program are to increase the NFIP policy base and the geographic distribution of policies and, ultimately, improve service to NFIP policyholders through the infusion of insurance industry knowledge with direct operating experience underwriting flood insurance. 

There also are several insurance companies that write primary coverage in high hazard flood zones. These companies are able to offer better coverage at lower cost than NFIP because they underwrite the risks on a property by property basis, while NFIP utilizes maps at the community level that may inadvertently include lower risks at a higher price. Private companies can charge rates that better align to the individual property risk, while NFIP charges national average rates that are too high for some and too low for others. 

If the private insurance sector is successful in directly writing high hazard flood insurance, it will be taking the properties that NFIP has overpriced, and leave NFIP with the ones that are underpriced.

One issue around private flood insurance is that it does not meet the insurance requirements of banks holding mortgages. Currently, five federal regulatory agencies are looking to require that regulated lending institutions accept private flood insurance policies, in addition to the NFIP policies made available by the Federal Emergency Management Agency.   

In another initiative to bring the private sector into the mix, FEMA entered into a reinsurance agreement, effective September 19, 2016, with private reinsurers: TransRe, Swiss Re, and Munich Re.  The overall protection provided by the reinsurance was minimal, but was the first step in putting together a more robust reinsurance program, which was completed effective January 1, 2017.  The NFIP purchased $1.042 Billion of annual reinsurance through a consortium of 25 reinsurers.

A solid reinsurance program could help NFIP address catastrophic losses, especially since they have no capital base. However, potential private sector reinsurers will be charging prices commensurate with the risk they are taking.  

Congress will have a lot to consider when addressing the re-authorization of NFIP. Importantly, Congress will not be able to broaden the base of participating private sector insurers and reinsurers without a significant overhaul of NFIP’s current risk pricing metrics.

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