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U.S. National Flood Insurance Program should include ‘greater participation’ from private market: Marsh


December 11, 2015   by Canadian Underwriter


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Insurers that contract with the United States National Flood Insurance Program should be allowed to write their own polices, and modern technologies should be used to evaluate property risk without having to rely on physical inspections, Marsh & McLennan Companies Inc. suggested in a recent report.

Damage from 2005 hurricanes, including Katrina, added US$19 billion in debt to the U.S. National Flood Insurance Program, Marsh & McLennan Companies Inc. said in a report recommending reforms to NFIP

In its report, titled Reforming the National Flood Insurance Program, Marsh & McLennan 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.”

NFIP was introduced in 1968 to enable residential and commercial owners and tenants to get flood coverage. In some cases, premiums are subsidized.

Quoting from the Federal Emergency Management Agency (NFIP), Marsh & McLennan said in its paper – released Dec. 9 – that the “write-your-own (WYO) program accounts for about 82%” of 5.2 million NFIP policies in force.

“Any claims payments that are made by WYO companies are reimbursed by the NFIP,” noted New York City-based Marsh & McLennan, whose subsidiaries include commercial brokerage Marsh Inc., reinsurance provider Guy Carpenter & Company LLC and management consultancy Oliver Wyman Group and Torrent Technologies Inc. Those subsidiaries worked with Marsh to produce the report.

NFIP should share risk with private industry, Marsh & McLennan contended.

“Greater participation by the private market can be easily encouraged by allowing WYOs to offer their own flood policy,” Marsh & McLennan said. “This is currently prohibited. By opening up private market participation, the NFIP can help improve the program’s sustainability by providing expertise and market stability.”

Britain plans to launch its own program, dubbed Flood Re, next April, Flood Re CEO Brendan McCafferty said last October at the National Insurance Conference of Canada (NICC) in Montreal. Flood Re, a reinsurer and special purpose vehicle setup by the British government, will impose a special levy of 180 million pounds per year in order to subsidize flood insurance for high-risk properties, McCafferty said at the time.

In Canada, three carriers (The Co-operators, RSA and Aviva) offer some overland flood coverage to residential property owners. But coverage in Canada “will likely not deal with all of the high-risk properties” and the “greatest riddle” in any flood program is how to manage the highest risk properties,” said Don Forgeron, chief executive officer of Insurance Bureau of Canada, at NICC.

“There is no single correct answer, and certainly no flood insurance model elsewhere in the world that can serve as an off-the shelf solution for us here in Canada,” Forgeron said at the time.

Insurance Brokers Association of Canada (IBAC) approved a flood principles document at its annual meeting in September, but has yet to make it public.

In developing the document, IBAC “got some overview of some of the different programs that are out there,” IBAC president Lorne told Canadian Underwriter in August. “Whether or not we think that one is better than the other – I don’t think we are ready to make that decision.”

In the United States, a property cannot qualify for NFIP coverage unless it is in a community that has joined the NFIP and agrees to enforce sound floodplain management standards.

“In exchange for access to flood coverage, these communities have adopted [the Federal Emergency Management Agency’s] minimum floodplain management guidelines and regulations to improve the flood mitigation infrastructure within Special Flood Hazard Areas (SFHAs),” Marsh & McLennan stated in Reforming the National Flood Insurance Program. “Communities with properties in flood zones that do not participate in the NFIP are ineligible for its coverage.”

In the report, Marsh & McLennan contends that the risk community size of NFIP should be increased.

“Greater participation in the NFIP has the potential to ultimately strengthen the program,” said Marsh & McLennan, which contends NFIP is “overly complex” for insurance professionals.

FEMA should “retain basement restrictions, but subject to a pre- determined sublimit,” Marsh & McLennan suggested. “FEMA could also consider adding optional basement coverage with a commensurate additional premium that provides the insured an option to purchase the coverage or to reject it.”

Federal politicians should also pass legislation “that allows for more insurers, including the current WYOs, to offer non-NFIP flood policies that would meet the mandatory purchase requirements” for special flood hazard areas, Marsh added.

“This would diversify the insurance risk pool and reduce the aggregate flood insurance exposure to the NFIP by adding private flood policies, which could reduce the need for additional borrowing from the US Treasury.”

As of Dec. 31, 2014, FEMA owed the US Treasury US$23 billion, up from US$20 billion as of November, 2012, the U.S. Government Accountability Office (GAO) reported recently. GAO, which reports on how the U.S. government spends money, is an independent agency that reports to Congress.

Marsh & McLennan noted in its report that “there is no central repository or database of the elevation data that is accessible to the public.”

The government could take advantage of “modern data sources like Global Positioning Systems and remote sensing technology such as light detection and ranging (LIDAR) instead of requiring physical inspections or surveys of each property,” Marsh & McLennan said.

GAO noted that a 2012 law – the Biggert-Waters Flood Insurance Reform Act – would have phased out “almost all discounted insurance premiums.”

But in March, 2014, the Homeowner Flood Insurance Affordability Act was passed. This “reinstated certain premium subsidies and slowed down certain premium rate increases that had been included in the Biggert-Waters Act,” GAO noted.

Marsh & McLennan noted that NFIP “was primarily self-funded” from 1968 through 2005, when the U.S. was hit by hurricanes Katrina, Rita and Wilma. Those storms resulted in US$19 billion in debt for NFIP.

“Excluding the debt from the 2005 storms, the NFIP was self-funded again from 2006 until October 2012,” MMC noted. MMC added that Hurricane Sandy “created an additional $7 billion in debt”

Hurricane Sandy was downgraded to post-tropical storm status when it made landfall about 200 kilometres south of New York City on Oct. 29, 2012.

Published reports indicate the storm flooded the New York City subway system and the Port Authority Trans Hudson (PATH) commuter train system.

At the time, Aon Benfield’s Impact Forecasting unit estimated insured losses from Sandy were US$30 billion (including $7.2 billion in NFIP payments) while total economic losses were estimated at $72 billion.