Filed Under:Markets, Personal Lines

House Committee To Mark Up Flood Bill; Study Shows Inadequate NFIP Rates

NU Online News Service, April 22, 1:10 p.m. EDT

The House Financial Services Committee plans to mark up legislation reauthorizing and reforming the National Flood Program May 12, according to industry officials.

The officials say the committee is planning to deal with the bill on that date in hopes of getting it through the full House before the Memorial Day recess, which starts May 27.

The current reauthorization of the program expires Sept. 30, the end of the government fiscal year.

Plans to get the bill through committee in early May were disclosed as the Property Casualty Insurers Association of America (PCI) released a research paper concluding that, overall, the federal government is providing flood insurance at roughly one-half the true-risk cost for NFIP policies.

In higher-risk areas where subsidies are greater, the true-risk cost is more than three times higher than NFIP rates, the study finds.

“We are releasing the findings of our new study on NFIP rates as a benchmarking tool to help lawmakers as they discuss the Flood Insurance Reform Act of 2011,” says Robert Gordon, PCI’s senior vice president of policy development and research.

He says the flood program is currently “saddled” with $17.75 billion of debt.

“We are pleased that the new bill in the House includes provisions to move the NFIP toward more adequate rates that will stabilize the program and reduce taxpayers’ exposure to costly relief efforts,” Gordon says.

The paper notes that PCI analysts calculated a rough approximation of the true market-risk cost of flood insurance based on recent analyses by the Congressional Budget Office and Government Accountability Office of the NFIP’s costs.

The analysts then added the additional amounts necessary if coverage were to be provided in the private sector (such as reinsurance, cost of capital, and taxes). 

While the market rate was only 23 percent higher for properties with lower flood risk, the market rate for properties explicitly subsidized under the NFIP was 208 percent higher than the current rate, according to the study.

“These large disparities between NFIP and market-risk rates are the result of the non-actuarial approach required of the NFIP, in addition to the fact that program rates do not reflect lost tax revenue, capital costs, nor the costs of a catastrophe backstop (with Treasury backstopping the risk exposure for very large, less frequent events),” the study finds.

The study adds, “Not only are current NFIP rates far below what a private market would have required to attract capital, but there are inadequate data available for flood risk modeling and numerous legal challenges.

“Insurers would find it difficult to obtain adequate rates to attract capital or be able to prevent adverse selection by homeowners, since insurers’ rates and coverages are subject to price controls and mandates in most states,” the study concludes.

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