As Congress weighs reauthorization of the National Flood Insurance Program (NFIP), it hasmultiple options for addressing the program's challenges and shouldtake into account specific insurance market, technological andother developments, according to a report by the American Academy of Actuaries.

Authored by the Academy's Flood Insurance Work Group, the publicpolicy report "National Flood Insurance Program: Challenges andSolutions" describes premium setting and program financingoptions for addressing the NFIP's debt and future obligations,including both public and private financing mechanisms, and otherpossible reforms.

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The report also notes that improvements in how flood risks areassessed and modeled are reducing the uncertainties surroundingflood risk and could lead to greater market participation by privateinsurers and reinsurers.

Reassessment of the role of the NFIP

"Better data and more advanced models are giving us a clearerview of flood risk, which opens up additional opportunities forprivate insurers and reinsurers to underwrite flood risk. That mayhave important implications for the NFIP," said Academy Vice President for Casualty Rade Musulin, thechairperson of the work group. "The reauthorization process canlead to reassessment of the role of the NFIP, which historicallyhas operated under financial conditions and rules different fromthose of private issuers, and with a different purpose."

The Academy's examination of reform approaches and aspects ofthe NFIP and the private flood insurance market covers:

• Options for paying for the program's debt and financing itsfuture obligations, including consideration of where publiccontributions to NFIP finances may be appropriate and of the timehorizon to be used to measure future obligations.
• The need for clarity around NFIP funding sources foractuarially sound rates to be computed.
• Take-up rates in "low-risk" areas and the potential benefitsand challenges of improving the NFIP risk pool to include moreproperties that are at lesser risk.
• How improved data and modeling may affect private marketunderwriting.
• Potential implications of flood insurance privatization,including the possibility of adverse selection for the NFIP ifprivate insurers underwrite more policies, as well as incorporationof private flood insurers within the state-level system ofinsurance regulation.
• Evaluation of existing approaches to property insurance marketchallenges at the state level and whether they could be used oradapted for the NFIP.
• Assessment of the value of the non-insurance activities of theNFIP, such as promulgating maps and encouraging smart land usepolicy, and consideration of how changes in those activities mightaffect other federal budget outlays such as disasterassistance.

Rising sea levels

In addition, the Academy encourages Congress to take a forwardlook at the NFIP in the context of rising sea levels, noting theprospect of sea level rise of 3 feet or more in the coming decadesand observing that the United States isespecially vulnerable to large property losses because of theamount of valuable property in at-risk coastal areas.

The report says, "In the face of rising sea levels and increasedlosses, it will be impossible [for the NFIP] to maintain currentpremiums, coverage, and eligibility without severe limits onbuilding, strong mitigation requirements, or exposure to enormousprogram losses and additional U.S. debt."

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