The quietest storm season in more than a decade prompted Congress to keep postponing permanent resolution of one of the country's biggest insurance challenges--how best to reform the debt-ridden National Flood Insurance Program.
As this story went to press, Congress--preoccupied with debates over health care and financial services regulation--was planning to attach a provision extending the NFIP once again for six-to-nine months while it deals with more urgent matters.
This latest effort would mark at least the fourth time Congress has extended the current NFIP since it originally expired on Sept. 30, 2008, because the House and Senate could not reconcile differences over a controversial proposal to include wind coverage in the federal program.
"We expect an extension to be attached to one of the final appropriations bills," said Blain Rethmeier, a representative for the American Insurance Association. "The time frame on the extension is still unknown, but it's imperative that the program not be allowed to expire."
A routine extension would leave up in the air the matter of whether to forgive NFIP's $20 billion debt, mostly built up thanks to Hurricane Katrina and other major storms. Meanwhile, debate about whether to develop a more comprehensive policy to deal with national catastrophes remains on the backburner.
Congress felt less urgency to settle the NFIP's future because there were only nine named storms in the Atlantic basin this year, with just three becoming hurricanes--the lowest totals in each category since 1997, according to the Insurance Information Institute.
"Clearly, Congress missed an opportunity to deal with the issue last year--especially the forgiveness of the debt--and eventually they are going to have to deal with it," according to Eli Lehrer, a fellow at the Heartland Institute.
"The economic problems, the budget deficit and the fact that the waters were cool this year have allowed Congress to delay action," he said. "Obviously, without a major hurricane, it is not going to become a major issue."
However, he warned, "the problem is that if Congress waits until there is a major disaster, it adds to the probability that it will act to reform it in the wrong way--for example, by adding wind to the program."
He said expanding the NFIP to cover wind would "undermine the private market and ultimately raise the price for all homeowners insurance products for consumers."
Insurance Information Institute President Robert P. Hartwig also sees NFIP reform as a long-term proposition. "It is unlikely that it will return to the front burner unless there is a significant hurricane accompanied by storm surge," he said.
As for a broader disaster reform bill, "most people believe reauthorization of the NFIP should be separated from a national catastrophe plan, because most insurers don't want to be obligated to provide flood coverage," said Mr. Hartwig. "If insurers are asked to cover flood insurance as part of a comprehensive solution, they will object:"
The reason, he said, is that states set rates which aren't adequate in coastal areas for wind coverage alone now. "Insurers are rightly highly skeptical that they would ever be allowed to charge a rate to cover expected flood losses," he explained.
Mr. Hartwig also commented on an amendment that Rep. Kathy Castor, D-Fla., sought to add to legislation reforming the financial services industry that would have declared state windstorm programs systemically risky.
The amendment, according to industry officials, was designed to shift the cost of bailing out Florida's troubled windstorm program to either large financial institutions or the federal government.
"The problems of the windstorm programs are of their own making," said Mr. Hartwig. "It is dubious to claim that they are systemically important in that they are too big to fail. That means if a hurricane hit Florida or other states with windstorm programs, the losses could lead to a global financial catastrophe. That is absurd--just preposterous. It will cause problems, but they are of the state's own making."
He added that "Florida has intentionally made a number of decisions that has put it on a collision course for a financial catastrophe. If Florida can no longer subsidize homeowners coverage for millionaires, that is not something that is going to bring down the global economy."
