Hunter Thinks Insurers Should Shoulder More Future Flood Losses

Lawmakers in both the Senate and the House last week examined the NFIP, taking a critical look at current reform efforts and the potential for easing future costs.

J. Robert Hunter, director of insurance for the Consumer Federation of America, suggested to the Senate Committee on Banking, Housing and Urban Affairs that insurers be required to put "skin in the game" and bear some of the risk themselves. (Currently, private insurers administer the program, with coverage sold by independent agents, but the industry assumes none of the federal flood exposure.)

In response Committee Chairman Richard Shelby, R-Ala., said such a plan would help shift the burden off of taxpayers.

Mr. Hunter also suggested that lawmakers consider reducing the program's costs by injecting a degree of competition into the market. He proposed a division into two categories–the actual risk and administrative costs. To encourage insurers to operate more efficiently, he said the NFIP could establish a pure premium, representing the risk element, and let insurers compete on the administrative element.

Among the other proposals offered would be to extend the flood zones for which insurance is required from the current 1 percent–or "once in 100 years" zone–to a "once every 500 years" zone.

Witnesses at the hearing, including Insurance Information Institute Chief Economist Robert Hartwig, also suggested expanding the pool of NFIP participants by mandating flood coverage as part of the standard homeowners policy–albeit a part still separately run by the same insurers currently offering flood coverage.

At a hearing of the House Financial Services Subcommittee on Housing and Community Opportunity later in the week, Rep. Gene Taylor, D-Miss., spoke about legislation he introduced–HR 3922–that would allow homeowners in the areas affected by Hurricane Katrina to buy flood insurance retroactively.

The hearings also allowed committee members to vent their frustrations over the slow pace of NFIP reforms enacted by Congress last year.

Sen. Paul Sarbanes, D-Md., the ranking member of the committee, said he was "concerned about the handling of flood claims, especially since [the Federal Emergency Management Agency] has not implemented many of the critical reforms Congress passed in response to the problems after Hurricane Isabel."

Sen. Jim Bunning, R-Ky., who crafted the bill extending and reforming the NFIP, took to task FEMA's acting director, David Maurstad, who is also federal insurance administrator in the mitigation division, which has authority over the flood program.

Sen. Bunning grew visibly upset as he questioned why FEMA has not yet even published proposed regulations to establish an appeals process for NFIP decisions 16 months since the bill was signed and 10 months after the regulations were supposed to have been finalized. "You have not gotten the job done," he said, adding that FEMA should "talk to the people in Maryland. Talk to the people in Louisiana, Mississippi and Alabama."

Mr. Maurstad said that FEMA has an appeals process, and that the agency is making a reasonable effort to formalize it.

"I do not accept a 16-month delay as reasonable," Sen. Bunning replied.

Reforms for the flood insurance plan are sorely needed, as losses in the wake of Hurricane Katrina are expected by FEMA to be greater than the total amount paid by the NFIP since its inception in 1968.

As a result, Mr. Maurstad said the agency will ask for a second increase to the program's borrowing authority. Congress already increased that authority to $2 billion in September, but Mr. Maurstad said the agency needs an additional $5 billion to cover its expenses through mid-November.

The magnitude of the post Katrina losses and their effect on the NFIP were not lost on insurance industry groups. Charles E. Symington Jr., senior vice president for government affairs and federal relations for the Independent Insurance Agents and Brokers of America, said it was "appropriate for Congress to take a good look at this very important program" and examine if there are any viable ways to strengthen it.

"We strongly support a careful examination of this crucial program and any viable legislation that would help strengthen it and shore it up for generations to come," he said.

Caption or callout:

Consumer advocate J. Robert Hunter suggested that insurers be required to put "skin in the game" and bear some flood risk themselves.