The uproar over actuarial rates on flood-insurance policyholders through a 2012 law appears to be on its way to resolution in the short-term, and this is not a moment too soon for a beleaguered property and casualty insurance industry.
However, in general, the longer the uncertainty over the operation of the National Flood Insurance Program (NFIP) continues, the greater the possibility that Write-Your-Own companies and customers will just decide to withdraw from the program, in the wise words of an industry lobbyist both intimately involved in the negotiations over the latest bill as well as with quick access to the bean counters.
He said the bean counters are telling him that making changes in the program is costly and time-consuming. Additionally, withdrawal from the program by companies, agents and customers will not be in the best interests of remaining customers or the country.
Another critical issue is the tensions and expense created by the need to re-fight a war supposedly resolved in 2012 is taking away from the industry’s top 2014 priority: reauthorization of the Terrorism Risk Insurance Act. The Senate Banking Committee will start the effort to restore order when it holds a hearing Tuesday on TRIA renewal.
It is the hope of many in the industry that the lengthy negotiations over revisiting the 2012 NFIP reauthorization law will not act as a further disincentive for the conservative House Financial Services Committee to reauthorize a reasonable facsimile of the current TRIA program. Some industry lobbyists are encouraged that the conservative House FSC members will not enter the negotiations over an extension of TRIA with a bad taste in their mouths 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 premium hikes imposed by the 2012 law, and the insurance industry, this time, had a role in drafting the legislation.
What the Senate will do with the bill is unclear, but it provides the basis for real-time negotiations between the two bodies, establishing a path for certainty in the direction of the program, by, at the latest, April 1.
For all the self-congratulations that will be provided by members of Congress when the bill is finally sent to the White House, there are a number of takeaways. The most important is that the bill is an example of how Washington behaves when it realizes it 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 the credibility of Congress. It also showed that when a political party’s overall policies aren’t consistent with the needs of constituents, members of Congress will abandon the party.
Everyone acknowledges that the legislation is stop-gap. Everyone in Congress just wants to get breathing space. Several members of Congress over the weekend said that in two years, negotiations will start over the legislation that will provide reauthorization of the current legislation when the current authorization runs out Sept. 30, 2017—and these talks will keep in mind the mistakes of the past and be cognizant that sweeping amendments to existing policies by people new to a complex game can easily backfire.
It should also be noted that despite the toxic atmosphere in Washington, when Congress finally got around to seeing that the 2012 bill was a mistake, it did not look for scapegoats. That was illustrated last week when the House Republican leadership ignored a letter from Louisiana Gov. Bobby Jindal (R) to crack down on administrative fees paid to WYO companies and agents, saying that an evaluation of 2012 flood insurance premiums indicates that only 44 percent of the premiums went to actual flood claims. Such a stance had been a demand by such consumer groups as GNO (the Greater New Orleans Organization) and StopFemaNow, two populist groups that led efforts to roll back the increases mandated by the 2012 law.
Both put out bulletins to members also circulated to members of Congress voicing outrage over the WYO costs.
Representatives of the WYO companies sing a different tune, one that the House took up, as its bill deals with administrative costs in a way that reduces the already considerable hassle the WYO companies will have in re-doing the software revised to start implementation of the 2012 law.
Industry officials say the current controversy over implementation is causing many WYO companies to re-evaluate their participation, and note that customers, too, are thinking of paying off their homes so that they don’t have to pay the NFIP premiums. One highly knowledgeable agent said the fees paid the companies by FEMA to administer the program constitute only a small profit and that they mostly do it as accommodation to their homeowners insurance customers.
This lobbyist also said the 2012 law “has been exceptionally complicated to implement.” He said “reversing course on its core provisions imposes equally complicated challenges for WYOs, agencies and vendors.” He notes that the House bill acknowledges the importance of the WYO companies because it specifies that the NFIP will be responsible, rather than the WYOs, for the process of refunding overpayments.
The lobbyist also said, “Unfortunately, Congress does not fully appreciate the enormous time, effort and cost that goes into maintaining and operating this program. It is a public-private partnership, but it won’t work if the WYO and vendors are not properly compensated for their additional costs.”
The lobbyist added, “We recognize that affordability is a key requirement of a successful insurance program,” and that the House legislation “provides greater stability to the NFIP than the current law or the bill approved by the Senate.”
Easing concerns on bank-centric regulation
On another important issue, insurance analysts and industry lawyers are saying action by the Federal Reserve Board last week in finalizing detailed capital and liquidity requirements for banks spoke loudly for concerned insurers because the lengthy documents did not mention non-banks.
It buttresses the emerging view that the Fed and other banking regulators will establish different rules for non-banks on capital and liquidity standards, as well as what it will look for in administering stress tests to non-banks designated as systemically significant, such as American International Group and Prudential Financial.
In its statement regarding the new standards, issued Feb. 18, the Fed said specifically that the final rule will not apply to nonbank financial companies that are designated by the Financial Stability Oversight Council for Federal Reserve supervision. Instead, the Federal Reserve Board said it will apply enhanced prudential standards to these institutions through a subsequently issued order or rule “following an evaluation of the business model, capital structure, and risk profile of each designated nonbank financial company.”
Oliver Ireland, a partner at Morrison & Foerster in Washington, D.C. and a former associate general counsel at the Fed, said the statement “pretty much said they are not doing non-banks the same way they are doing banks,” that they plan a “more-tailored regime” for overseeing non-banks.
Incoming Fed chair Janet Yellen made that clear in answering questions about non-banks in her first appearance as chairman before the House Financial Services Committee two weeks ago. The issue is expected to come up again when Yellen testifies on the same issues Thursday before the Senate Banking Committee.
“We understand that the risk profiles of insurance companies really are materially different and we are trying our best to craft a set of capital and liquidity standards that will be tailored to an appropriate—to the risk profiles of insurance companies,” she said.