As California contemplates departure from the National Flood Insurance Program (NFIP) and new cabinet picks begin making their mark on the federal landscape, Congress has begun to turn a portion of its efforts to reforming and reauthorizing the program.
NFIP started out as a bridge to a fully private flood insurance market, but was re-engineered by bureaucratic edict in 1978 to become a federal flood insurance monopoly. It now owes taxpayers more than $23 billion, despite the efforts of a new generation of focused and committed NFIP officers and staff.
Hoping to beat the clock on Congressional reauthorization of NFIP scheduled for September, Washington lawmakers have introduced reform legislation. Representatives Dennis Ross (R-Fla.) and Kathy Castor (D-Fla.) reintroduced the Flood Insurance Market Parity and Modernization Act, which states that qualified private flood insurers must be recognized and accepted by lenders on the same basis as NFIP. The bill is designed to correct certain confusing language found in prior legislation. Senators Dean Heller (R-Nev.) and Jon Tester (D-Mont.) introduced a companion measure in the Senate.
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Passage of this legislation should result in a flourishing private market, but only if NFIP reauthorization does not introduce provisions that recreate an uneven playing field, and the program discontinues practices that impede the expansion of the private flood market.
The market parity bill will allow NFIP to operate as it was originally intended: as a bridge to a flourishing private flood insurance market. Only a free market for flood insurance can stop the transferring of billions of dollars in flood losses to U.S. taxpayers.
However, passing the market parity legislation alone will not be enough. Congress must also add mandates designed to disengage the nation from the nationalization of flood risk. The NFIP flood insurance monopoly must be carefully brought to an end for the good of flood insurance buyers and taxpayers.
Dismantling the monopoly
For many years, NFIP has maintained a monopoly on the flood insurance market through the write your own (WYO) flood insurance network. As massive losses for taxpayers mount, the NFIP WYO program has effectively impeded the participation of private flood insurers in the U.S. flood market by making it more profitable to become a WYO than to assume flood risk. WYOs do not compete on price; they all offer the same NFIP prices to flood insurance buyers.
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The WYO system sells flood insurance through just 10% of the over 270,000 property insurance agents in the U.S. This actually reduces the number of Americans who purchase flood insurance from NFIP by restricting the number of Americans receiving flood insurance price quotes.
As non-risk-bearing components of NFIP, WYOs are tacitly identical to private market managing general agents (MGAs). Like MGAs, WYOs are specialists who act as knowledgeable insurance distribution specialists.
Can we broaden the distribution of — and therefore the geographic spread of — risk assumed by NFIP by leveraging the private market? Well, if WYOs are essentially MGAs for NFIP, why not let MGAs, who act as flood specialists for private insurers, access NFIP, much like WYO participants do? NFIP already has the authority to make this change. Of course, it can also be accomplished through an act of Congress. Either way, it makes good sense.
Implementing this change would level the playing field and allow over 240,000 insurance professionals who are not selling NFIP insurance to do so through MGAs with whom they already have a relationship. Flip a switch and, presto, your sales force increases by 90%! That is quite an opportunity.
Consider all of this in light of the fact that the WYOs are lobbying to have their mandate changed to allow them to sell both private flood and NFIP flood insurance simultaneously. On its own, this change would allow them to exploit their position as federally sponsored flood insurance distributors by rolling the best NFIP flood risks into their own books of private market policies in what would be a competitive vacuum. It is also important to note here that the several largest WYOs account for close to 80% of NFIP premiums. Do we really want to trade an NFIP monopoly for a WYO oligopoly?
It seems obvious that allowing MGAs to efficiently and competitively provide both private and NFIP quotations to insureds across the country is an absolute must if WYOs are allowed to write private market flood insurance while maintaining their government sponsored advantage. Using MGAs to expose the NFIP system to real competition for the first time will benefit consumers and taxpayers as competition drives down prices and drives up efficiency.
Further, WYOs have been concentrating their sales efforts on the approximately 10 million U.S. households that are located in special flood hazard areas and essentially ignoring the remaining 121 million households that are also exposed to some risk of flooding.
More agents to sell, more customers to buy, less debt for NFIP
Using this approach, private market MGAs would be compensated by NFIP at a rate commensurate with the existing percentage paid to WYO providers, just as the WYOs will be receiving similar compensation for business placed in the private market.
If implemented using computerized data interface access to NFIP by MGAs, this simple change could introduce something that has been missing in the American flood insurance marketplace for more than 40 years: the curative power of competition.
Craig Poulton is chief executive officer of Salt Lake City-based Poulton Associates, which administers the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program, at CATcoverage.com. He can be reached at firstname.lastname@example.org. Opinions expressed are the author's own.