The uproar over actuarial rates on flood-insurance policyholdersthrough a 2012 law appears to be on its way to resolution in theshort-term, and this is not a moment too soon for a beleagueredproperty and casualty insurance industry.

However, in general, the longer the uncertainty over theoperation of the National Flood Insurance Program (NFIP) continues,the greater the possibility that Write-Your-Own companies andcustomers will just decide to withdraw from the program, in thewise words of an industry lobbyist both intimately involved in thenegotiations over the latest bill as well as with quick access tothe bean counters.

He said the bean counters are telling him that making changes inthe program is costly and time-consuming. Additionally, withdrawalfrom the program by companies, agents and customers will not be inthe best interests of remaining customers or the country.

Another critical issue is the tensions and expense created bythe need to re-fight a war supposedly resolved in 2012 is takingaway from the industry's top 2014 priority: reauthorization of theTerrorism Risk Insurance Act. The Senate Banking Committee willstart the effort to restore order when it holds a hearing Tuesdayon TRIA renewal.

It is the hope of many in the industry that the lengthynegotiations over revisiting the 2012 NFIP reauthorization law willnot act as a further disincentive for the conservative HouseFinancial Services Committee to reauthorize a reasonable facsimileof the current TRIA program. Some industry lobbyists are encouragedthat the conservative House FSC members will not enter thenegotiations over an extension of TRIA with a bad taste in theirmouths from the extended talks over amending the 2012 NFIP law.

A vote is likely in the House Wednesday on the legislation rolling back most of the increases in NFIP premiumhikes imposed by the 2012 law, and the insurance industry, thistime, had a role in drafting the legislation.

What the Senate will do with the bill is unclear, but itprovides the basis for real-time negotiations between the twobodies, establishing a path for certainty in the direction of theprogram, by, at the latest, April 1.

For all the self-congratulations that will be provided bymembers of Congress when the bill is finally sent to the WhiteHouse, there are a number of takeaways. The most important is thatthe bill is an example of how Washington behaves when it realizesit made a mistake.

Another is that wave elections are dangerous. The 2012 law,written by a new Congress seeking to keep peace with the Tea Party,exposed political deals going back to the 1970s and weakened thecredibility of Congress. It also showed that when a politicalparty's overall policies aren't consistent with the needs ofconstituents, members of Congress will abandon the party.

Everyone acknowledges that the legislation is stop-gap. Everyonein Congress just wants to get breathing space. Several members ofCongress over the weekend said that in two years, negotiations willstart over the legislation that will provide reauthorization of thecurrent legislation when the current authorization runs out Sept.30, 2017—and these talks will keep in mind the mistakes of the pastand be cognizant that sweeping amendments to existing policies bypeople new to a complex game can easily backfire.

It should also be noted that despite the toxic atmosphere inWashington, when Congress finally got around to seeing that the2012 bill was a mistake, it did not look for scapegoats. That wasillustrated last week when the House Republican leadership ignoreda letter from Louisiana Gov. Bobby Jindal (R) to crack down onadministrative fees paid to WYO companies and agents, saying thatan evaluation of 2012 flood insurance premiums indicates that only44 percent of the premiums went to actual flood claims. Such astance had been a demand by such consumer groups as GNO (theGreater New Orleans Organization) and StopFemaNow, two populistgroups that led efforts to roll back the increases mandated by the2012 law.

Both put out bulletins to members also circulated to members ofCongress voicing outrage over the WYO costs.

Representatives of the WYO companies sing a different tune, onethat the House took up, as its bill deals with administrative costsin a way that reduces the already considerable hassle the WYOcompanies will have in re-doing the software revised to startimplementation of the 2012 law.

Industry officials say the current controversy overimplementation is causing many WYO companies to re-evaluate theirparticipation, and note that customers, too, are thinking of payingoff their homes so that they don't have to pay the NFIP premiums.One highly knowledgeable agent said the fees paid the companies byFEMA to administer the program constitute only a small profit andthat they mostly do it as accommodation to their homeownersinsurance customers.

This lobbyist also said the 2012 law “has beenexceptionally complicated to implement.” He said “reversing courseon its core provisions imposes equally complicated challenges forWYOs, agencies and vendors.” He notes that the House billacknowledges the importance of the WYO companies because itspecifies that the NFIP will be responsible, rather than the WYOs,for the process of refunding overpayments.

The lobbyist also said, “Unfortunately, Congress does not fullyappreciate the enormous time, effort and cost that goes intomaintaining and operating this program. It is a public-privatepartnership, but it won't work if the WYO and vendors are notproperly compensated for their additional costs.”

The lobbyist added, “We recognize that affordability is a keyrequirement of a successful insurance program,” and that the Houselegislation “provides greater stability to the NFIP than thecurrent law or the bill approved by the Senate.”

Easing concerns on bank-centric regulation

On another important issue, insurance analysts and industrylawyers are saying action by the Federal Reserve Board last week infinalizing detailed capital and liquidity requirements for banksspoke loudly for concerned insurers because the lengthy documentsdid not mention non-banks.

It buttresses the emerging view that the Fed and other bankingregulators will establish different rules for non-banks on capitaland liquidity standards, as well as what it will look for inadministering stress tests to non-banks designated as systemicallysignificant, such as American International Group and PrudentialFinancial.

In its statement regarding the new standards, issued Feb. 18,the Fed said specifically that the final rule will not apply tononbank financial companies that are designated by the FinancialStability Oversight Council for Federal Reserve supervision.Instead, the Federal Reserve Board said it will apply enhancedprudential standards to these institutions through a subsequentlyissued order or rule “following an evaluation of the businessmodel, capital structure, and risk profile of each designatednonbank financial company.”

Oliver Ireland, a partner at Morrison & Foerster inWashington, D.C. and a former associate general counsel at the Fed,said the statement “pretty much said they are not doing non-banksthe same way they are doing banks,” that they plan a “more-tailoredregime” for overseeing non-banks.

Incoming Fed chair Janet Yellen made that clear in answeringquestions about non-banks in her first appearance as chairmanbefore the House Financial Services Committee two weeks ago. Theissue is expected to come up again when Yellen testifies on thesame issues Thursday before the Senate Banking Committee.

“We understand that the risk profiles of insurance companiesreally are materially different and we are trying our best to crafta set of capital and liquidity standards that will be tailored toan appropriate—to the risk profiles of insurance companies,” shesaid.