A demand by a House Financial Services subcommittee chairmanthat bank regulators move quickly to impose a rule requiringmortgage lenders to accept private flood insurance is prompting asplit in the insurance industry.

The letter sent to federal bank regulators by Rep. RandyNeugebauer, R-Texas, said that the provision's intent “is toreaffirm and support pre-existing requirements that lenders acceptcomparable private flood insurance policies” as an alternative topolicies offered by the National Flood Insurance Program.

He says, “I believe that once fully implemented, this provisionwill further encourage private-sector participation in the floodinsurance market and reduce the risk to which the U.S. taxpayer iscurrently exposed.

“The agencies' timeline to delay implementation for a possibletwo years after enactment imposes additional and unnecessary riskon the NFIP, and ultimately the U.S. taxpayer.”

Neugebauser says prompt implementation of the private insuranceprovision is one of his highest priorities.

Neugebauer replaced Rep. Judy Biggert, R-Ill., as chairman ofthe Housing and Insurance Subcommittee of the House FinancialServices Committee in this Congress.

The letter was sent to the heads of the Federal Reserve System,the Federal Deposit Insurance Corporation, the Comptroller of theCurrency, the National Credit Union Administration and the FarmCredit Administration.

Specifically, Neugebauer is requesting “a more formal andregular update of any interagency actions” needed to developregulations needed to require lenders to accept private floodinsurance. He wants these rules in place before the July 2014anticipated target date for the rule, Neugebauer said.

Jimi Grande, senior vice president of federal and politicalaffairs for the National Association of Mutual Insurance Companies,says NAMIC was a strong supporter of the provision, whichrecognizes that private flood insurance carriers can satisfy themandatory purchase requirement for those who buy homes whosemortgages are federally insured.

“Allowing those insurers who want to offer flood insuranceoutside of the NFIP to do so will help to reduce the exposure ofthe NFIP, the federal government, and ultimately the taxpayers, toflood risk. Like Neugebauer, we encourage action on thisissue as swiftly as possible,” Grande said.

However, in a letter last June as Congress debated the NFIPreauthorization in which the provision is included, the presidentof the company that handles most of the back-office work forWrite-Your-Own insurance companies urged caution.

Stephen Harty, president of National Flood Services inKalispell, Mont., says in a letter to Senate negotiators dealingwith the reauthorization that privatization proposals for the NFIPbe delayed until the full impact could be studied.

He also voiced concerns it would pull from the NFIP floodinsurance customers in areas unlikely to flood, thereby raising thecost of NFIP coverage to the people who can least affordit.

Harty adds, “It is not clear that private insurers have, orwould be willing to allocate, sufficient underwriting capacity forprivate flood insurance.”

Harty says private insurers will require higher premiums than docurrent NFIP policies because of different loss-ratio tolerances,additional overhead expenses chargeable to the program, and profitexpectations.

“The result will be higher prices for homeowners and smallbusinesses,” Harty says.

An insurance industry official said that, currently, only a fewinsurers write flood insurance coverage. These are mainly theinsurers of high-end residential properties, such as Chubb'sMasterpiece program, and Lloyd's of London.

In his letter, Neugebauer says the provision was “an essentialreform” to the legislation, which was enacted last July. Itreauthorized the NFIP for 5 years and imposed certain reforms aimedat making the program self-sufficient.

Currently, the NFIP owes the Treasury almost $30 billion,primarily because of the costs of Hurricanes Katrina and Rita in2005 and Superstorm Sandy, which hit the Northeast last fall.

David Barr, a spokesman for the FDIC, the federal regulator ofstate-chartered banks, says it would not have any comment on theletter.

.