NU Online News Service, April 8, 3:01 p.m. EDT

The door for the private market to play a strong role in insuring against flood would be opened through several provisions in legislation reauthorizing the National Flood Insurance Program (NFIP) passed by a House panel late Wednesday.

For the first time, the Federal Emergency Management Agency (FEMA) is explicitly authorized under the legislation to "carry out initiatives to determine the capacity of private insurers, reinsurers and financial markets to assume a portion the flood-risk exposure in the United States."

The bill also gives FEMA the power to tear down and rebuild flood-damaged properties. This authority should be considered by FEMA "as an eligible activity" for the purpose of mitigation assistance, the bill says, with the caveat that such action "must be cost-effective."

FEMA, an agency under the Department of Homeland Security, administers the NFIP.

The bill is H.R. 1309, the Flood Insurance Reform Act of 2011.

It was passed by voice vote by the House Subcommittee on Insurance, Housing and Community Opportunity. Industry officials believe the full House Financial Services Committee is likely to take up the bill in early May.

The bill "clarifies" the power of the FEMA administrator to utilize private-market reinsurance capacity to minimize the likelihood that the program would need to borrow additional funds from the Treasury.

The legislation also directs FEMA to assess the capacity of the private reinsurance market by seeking proposals to assume a portion of the program's risk and to submit a report on such assessment within six months of enactment.

The bill also requires FEMA to report to Congress annually on the status of the NFIP and to provide detailed information about the financial status of the program.

Currently, FEMA is required to report to Congress on the program every two years.

Regarding the bill's language on looking into more private-sector involvement in the program, Jim Whittle, assistant general counsel for the American Insurance Association (AIA), says there already is involvement from insurance companies in the NFIP through the Write Your Own program.

As far as the private sector taking on a share of the flood risk, he says he is interested to see what conclusions studies by the Government Accountability Office and the NFIP reach.

He says the government's motivation for exploring more private action can be looked at in two ways. First, "like any entity that is insuring," the government is looking to diversify its assumed risk. Second, he says the federal deficit and the NFIP's own deficit stemming from the 2005 hurricane season make it unsurprising that that the government is looking to reduce the program's risk to the federal treasury.

Regarding his thoughts on the ability of the private sector to assume a greater share of flood risk, Whittle notes that there was a federal study on insuring flood risks done in 1965. He says back then, the nature of the risk in the mind of insurers defied customary insurance principles regarding the ability to spread risk and avoid adverse selection. As a consequence, he says there were few writers of flood insurance.

He says he is interested to see if the new federal studies reveal any changes in the private sector's attitude toward the risk.

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NFIP-Extension Bill Opens Door For Greater Private-Market Role

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