The property and casualty insurance industry should wake up and smell the coffee.

That's because the industry is now engaged in the worst of all possible worlds, a two-front war. And, equally important, there is no clear path out of the tunnel the industry currently finds itself in.

The problems are the unexpected reopening of the issue of the high deficits facing the National Flood Insurance Program through legislation passed by the Senate last week — an issue moving to a House apparently unwilling to rubber stamp the Senate action.

Therefore, this emerging issue stands in the way of the second issue and the industry's top legislative priority: reauthorization of the Terrorism Risk Insurance Act. That program expires Dec. 31.

The P&C industry saw itself in relatively good shape as the current Congress started work in January 2013. While the nation would be led by a Democrat, there would be divided government, with a Republican-led House in perfect position to guard the industry's flanks. That is, the industry would have in place an entity in a position to strongly counter any Obama-administration initiative for a broad federal takeover of insurance oversight (Indeed, that ability will be on stark display Tuesday, when the leadership of the House Financial Services Committee holds a hearing where it plans to signal the administration in unequivocal terms that the current state-based regulatory system, as dysfunctional as it is, will remain the status quo ante as long as they are in charge).

Moreover, in the industry's view, its greatest headwind had evaporated: the uncertainty created by the fact that a major safety valve, the National Flood Insurance Program, in limbo since its authorization expired Sept. 30, 2008, was finally reauthorized through legislation enacted in July 2012. That legislation supposedly cleared a path for a return to solvency for the NFIP.

So in early 2013, the industry confidently laid out its plan for Job No. 1: prompt reauthorization of the Terrorism Risk Insurance Program ahead of its scheduled expiration date of Dec. 31, 2014.

But last week's passage by the Senate of legislation that would have the practical effect of delaying scheduled NFIP rate increases for up to four years reopens an issue the industry thought it had put behind it.

But the situation is far worse than it was in 2012 before passage of the law that phased in actuarial rates for flood insurance for four years. That's because any changes imposed by Congress will take no less than six months for the Write-Your-Own insurers who administer the program to implement, according to an official letter by the group. And there are three other factors involved:

First, it will be costly for WYO insurers to rewrite the software used to implement the program, in other words, do the billing, etc.

Second, the Congressional Budget Office says that the changes will potentially increase the NFIP deficit by $1.9 billion over 10 years, and that is before the virtual certainty that because of climate change there will be more Katrinas and Sandys creating an even bigger eyesore for a Congress already dealing with intense demands for lesser government.

Third, Congress has yet to start dealing in detail with reauthorization of TRIA. The House Financial Services Committee had planned to take up the issue starting in March. and the leadership of the panel has already signaled it wants to put its lesser-government stamp on the issue, i.e., more industry skin in the game in any legislation reauthorizing TRIA.

The House is balking at accepting the Senate package rolling back the flood-rate increases, and, again, the House FSC wants to "put its own stamp on the legislation." But, it will face intense political pressure. That pressure is coming from the Senate, from consumers and from powerful state interests, real estate interests, homebuilding interests and mortgage-banking industry interests, all of which have a huge stake in the issue.

Effectively, the Senate legislation is an effort to adroitly camouflage the fact that Congress didn't realize that, through passage of the 2012 bill mandating actuarial rates for flood insurance, it was exposing political deals going back to 1972.

Industry officials grimaced when, during Senate debate on the flood bill last week, Sen. Heidi Heitkamp, D-N.D., cited the case of one woman homeowner in her state whose $60,000 NFIP policy was going to rise from the current $625 to $10,600 in one fell swoop.

That will back up into the talks over TRIA, leaving House FSC conservatives with less room to maneuver on the TRIA legislation. And the pressure from conservative backers to hold the line is increasing, not receding.

It also isn't very helpful to the industry that the chief Republican sponsor in the House of the Senate flood bill, as well as the TRIA reauthorization legislation preferred by the industry, is Rep. Michael G. Grimm, R-N.Y.

Grimm was the "star" of the State of the Union address, making a spectacle of himself by being caught on camera in the Capitol physically threatening a reporter, saying, "I'll break you in half" and threatening to throw him off a balcony.

Adding to the pressures on the conservative leadership of the House FSC is a campaign-finance report released late last week saying that conservatives seeking to pull the Republican Party to the right raised more money last year than the groups controlled by the party establishment.

Members of Congress are skilled debaters. But they will be facing a variety of pressures dealing with critical issues whose resolution is needed to provide certainty to an industry providing basic services critical to the smooth functioning of the U.S. economy. Missteps could derail the fledging housing recover and impact the national security of our nation.

And we will have to go back to the 1950s to find a Congress comparable to this one, and that analogy is not a positive one.

As for the House FSC hearing, it will feature an appearance by Michael McRaith, director of the Federal Insurance Office. He will discuss the agency's modernization report, released in December, and defend its conclusion that Congress and the states should work for a greater federal role in an industry that is becoming more global in nature. At the same time, the committee plans to have on hand witnesses aimed at making clear to the Obama administration that states should play a strong role in shaping the U.S. response to those pressures.

Special Reports /

The Washington Report: Industry Fighting Two-Front War with Legislators

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