American officials call for private carriers in flood insurance market

A bill before the United States House of Representatives would “encourage the development of a robust private flood insurance market”, says an American politician who sponsored that bill, but one advocate warns that if the bill is passed into law, the nation’s National Flood Insurance Program could be “stuck with the worst and most risky claims.”

The Flood Insurance Market Parity and Modernization Act was passed March 2 by the Financial Services Committee of the House of Representatives. It has yet go to a vote before the full House or before the Senate.

If passed into law, the bill would change the Flood Disaster Protection Act of 1973. That law “requires federal financial regulatory agencies to adopt regulations prohibiting their regulated lending institutions from making, increasing, extending or renewing a loan secured by improved real estate or a mobile home located or to be located in a [special flood hazard area] in a community participating in the NFIP unless the property securing the loan is covered by flood insurance,” the U.S. Federal Reserve states on its website.

The Flood Insurance Market Parity and Modernization Act would “allow private insurers to come into the flood insurance market, creating competition and choice in policies and pricing to benefit homeowners,” stated Dennis Ross, a Republican representing the 15th District of Florida in the House of Representatives, in a release March 2. The bill “would encourage the development of a robust private flood insurance market that will provide homeowners more coverage options and lower costs.” Ross is one of the congressmen who sponsored the bill.

The bill would include – in the definition of “insurance” in the Flood Disaster Protection Act of 1973 – coverage provided by a carrier “eligible as a nonadmitted insurer to provide insurance in the home State of the insured.” It would also let surplus lines insurer provide insurance stipulated in the Flood Disaster Protection Act of 1973.

Under NFIP, flood insurance rates do not differ among carriers and agents, and in some cases premiums are subsidized. In order to qualify for flood insurance under NFIP, the property must be in a community that has joined the NFIP and agrees to enforce sound floodplain management standards.

In a recent report, titled Reforming the National Flood Insurance Program, Marsh & McLennan Companies Inc. noted that since 1983, insurers have been able to market, sell, and service NFIP policies “under their own name in exchange for an administrative allowance from the NFIP.”

In that paper, Marsh & McLennan recommended that the flood insurance market be opened up to private participation.

NFIP “was created in 1968 to provide flood coverage to consumers who were unable to get coverage from the very limited private market,” said Emanuel Cleaver, a Democrat representing the 5th district of Missouri in the House of Representatives, during a hearing Jan. 13 of the insurance and housing subcommittee of the House Financial Services Committee. He suggested that when catastrophes such as Hurricane Katrina and Hurricane Sandy occur, “it pretty much decimates any private participation and the government has had to do a lot of backstopping.”

Testifying before the subcommittee was Brady Kelly, executive director of the National Association of Professional Surplus Lines Offices, based in Kansas City, Mo.

“Consumers whose flood risk do not fit within the terms and limits of the NFIP or whose risks are declined by the standard market, will look to our market – surplus lines – for the solution,” Kelly told the subcommittee Jan. 13. “Homeowners may want replacement coverage rather than actual cash value for their property. They might want top insure additional structures,” he said, adding some may want coverage for additional living expenses or business interruption.

“Facilitating increased private sector involvement in the sale of flood insurance will help promote consumer choice and spur competition,” Teresa Miller, Commissioner of the Pennsylvania State Insurance Department, told the subcommittee. “It will also provide homeowners necessary coverage, often at greatly reduced cost.”

Miller was testifying on behalf of the National Association of Insurance Commissioners.

A third witness had some misgivings about the Flood Insurance Market Parity and Modernization Act.

If that bill is passed into law, surplus lines carriers “would cherry pick” certain property policies, suggested Birny Birnbaum, executive director of the Center for Economic Justice, an Austin, Tex.-based organization that advocates for availability and affordability of insurance.

There is a “great opportunity” for greater reliance on private insurers but the Flood Insurance Market Parity and Modernization Act is not the best approach, Birnbaum contended.

“The best approach… is to require that flood be covered in standard residential and commercial property insurance policies and subject to the same state based regulatory framework that exist for homeowners and commercial property insurance today,” Birnbaum told the subcomittee.

He noted that under NFIP, there are 30 different levels of risk. If surplus lines carriers start writing some of those risks, the NFIP “would be stuck with the worst and most risky claims but no more revenue,” Birnbaum warned.

“There is no insurance mechanism, public private or combo, that will be able to finance increasingly frequent and severe flooding, and a focus on resiliency and sustainability means federal expenditures as investments today, to replace disaster relief expenditures tomorrow,” Birnbaum warned.

“We are dealing with a rather complicated issue of how to have a national flood insurance program that serves our public well,” Maxine Waters, a Democrat representing an area of southern Los Angeles in the House, said during the hearing.

Waters – also a member of the Financial Services Committee – was one sponsor of the Biggert-Waters Flood Insurance Reform Act of 2012, which required insurance rates for policies under NFIP to be raised, in some cases, to reflect true flood risk.

Waters noted on Jan. 13 that there were “unintended consequences” of that law and she has been “apologizing” for the past four years.

“I am very interested in whether or not we can have a private public operation that will do the best job for our constituents,” Waters told the subcommittee.