From the January 10, 2011 issue of National Underwriter Property & Casualty • Subscribe!

Private Market Should Insure Both Wind & Flood, ABA Says


The American Bankers Association is calling for "wholesale" overhaul of the National Flood Insurance Program (NFIP), including providing incentives for the private market to assume a greater role.

The private market role should include creation of multi-peril coverage, that is, combined wind and flood coverage, the ABA said.

Separately, the National Association of Mutual Insurance Companies is urging the Obama administration to reform, but not privatize the NFIP.

Both the ABA's comments and NAMIC's message were sent to the Federal Emergency Management Agency, which oversees the NFIP.

The ABA said in its letter to FEMA that, regardless of the policy alternative ultimately chosen for NFIP reform, "ABA believes that FEMA should promote the establishment of private insurance alternatives, including multi-peril policies, as a means of encouraging competition and increasing the availability and affordability of coverage for all at-risk properties."

The letter, signed by Virginia O'Neill, who is senior counsel at the ABA Center for Regulatory Policy, said that the ABA would also "encourage" FEMA to set minimum standards for flood insurance coverage and permit state insurance regulators to approve private flood insurance policies using existing state guidelines or state policy form guidelines.

Alternatively, the ABA said that FEMA could permit states to include flood as a covered peril under a standard hazard property insurance policy.

"ABA believes that this would promote market options while reducing bank compliance burdens in favor of the risk management controls banks use to manage hazard insurance for property held as collateral for a loan," Ms. O'Neill said.

Finally, she said, ABA supports efforts to update and improve flood risk identification and communication.

FEMA asked for comment letters as part of a new initiative aimed at providing Congress with a "comprehensive analysis" that addresses issues both of immediate concern "as well as establishing a solid foundation for the NFIP's future."

FEMA held public meetings on the issue in Washington and Denver last month.

The letter was one of 60 sent to the agency regarding its request for comments. The comment period closed Dec. 31.

Most of the letters were from emergency management agencies associated with states particularly affected by flooding, including Michigan and Mississippi.

The ABA's comments are in line with those voiced by officials of the Reinsurance Association of America and the Association of Bermuda Insurers and Reinsurers at one of the hearings.

"ABA believes that concerns about the actuarial soundness of the NFIP, the ever-increasing cost to the U.S. Treasury of providing federal disaster relief to the uninsured, and a host of complex mapping, environmental and floodplain management issues necessitate wholesale reform of the NFIP," Ms. O'Neill said in the comment letter.

She said that a "necessary predicate" to NFIP reform must be the recognition that tying the mandatory purchase of flood insurance to only those with federally insured residential mortgages--and charging financial institutions with its enforcement--has failed to cover adequately all at-risk properties to the detriment of the viability of the NFIP.

She added that it also imposes a "significant and disproportionate compliance burden" on insured depository lenders.

Thus, she said, the ABA urges "that any reform effort end the system's dependence on bank enforcement of NFIP coverage in favor of the establishment of a new framework that promotes market options, increases the availability and affordability of coverage for all at-risk properties, and eliminates compliance burden in favor of safe and sound risk management controls."


NAMIC called for less radical reforms in its comment letter.

"We believe that the best, most effective and viable option is maintaining the current NFIP framework while implementing reforms that address existing weaknesses," said the Washington office of the mutual insurer group.

"The presence of a federal program is just as important today as it was 40 years ago," the NAMIC comment letter said. "The driving force behind the creation of the NFIP--no viable private market--remains the fundamental issue," NAMIC said.

NAMIC said the problem with privatization is that in order to underwrite a risk like flood, an insurer would need to charge very high premiums and maintain significant capital reserves in case of massive flooding, when all of their policyholders would be making claims.

"In actuality, the only people who would be able to afford coverage would likely be those that did not need it," NAMIC said in its comment letter.

The letter added: "The question has been asked as to whether the private insurance market is ready to handle flood risk now, but nothing about the situation has fundamentally changed and primary insurers are still unable to offer this coverage. Technically, the market is already 'privatized' in that there is nothing preventing companies from currently writing flood coverage and competing with the NFIP. Almost none have elected to do so."

The NAMIC letter also rejected another proposal--price controls.

"Price controls further diminish the opportunity for a private market for flood insurance to develop," NAMIC said.

"In order to achieve a fully privatized market, companies would need to be able to charge actuarially sound, risk-based rates," the NAMIC comment letter explained.

However, there are two main problems with this approach, NAMIC noted.

First, lawmakers and regulators often impose restrictions that allow high-risk property owners to pay artificially low insurance premiums, forcing lower-risk property owners to subsidize the insurance costs or creating hidden cross-subsidization.

"Secondly, even if rating freedom was achievable, the premiums would likely be much more expensive, making affordability a major issue," the letter observed.

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