Last year, renewal discussions for the National Flood Insurance Program (NFIP) got off to an early and — by most accounts — very productive start.
Both Congress and the insurance industry sought to avoid the four years of program lapses and short-term extensions that preceded 2012′s reauthorization, and there was a clearer understanding among legislators and industry representatives about the flood program, its shortcomings, and what some realistic solutions might look like.
Now with the Sept. 30, 2017, deadline for renewal looming larger, P&C industry representatives say they are focused on turning 2016′s favorable discussions into substantive action — with the aim of securing both a timely NFIP extension and key reforms that would allow for a more robust private Flood-insurance marketplace.
"I don't know if we're all on the same page, but we're not in the conflict stage that we've sometimes been on this," Frank Nutter, president of the Reinsurance Association of America (RAA), says of the discussions so far between the industry and legislators. While all the players have yet to see the proposed bill, much less weigh in on it, the mood feels more positive than last time the NFIP's authorization expired, he adds.
The reauthorization talks are taking place as the program finds itself $1.6 billion further in debt, borrowing that amount from the Treasury Department in January to help cover 2016 expenses. The NFIP's total debt is now approaching $25 billion, stemming mostly from two events: 2005′s Hurricane Katrina (more than $17 billion) and 2012′s Superstorm Sandy ($6 billion).
The program's fiscal troubles have led to increasing calls by key members of Congress for reforms, including a larger role for insurers in covering flood risk. The challenge is balancing what insurers would need to compete in a healthy Flood insurance marketplace with what legislators are willing to pass.
Who wants what
Don Griffin, vice president, personal lines for the Property Casualty Insurers Association of America (PCI), outlines what the insurance industry would like to see from NFIP discussions in order for it to realistically compete in a Flood insurance marketplace:
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An NFIP extension, for five years if possible, which would bring stability to the flood marketplace as private insurers try to launch products;
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Continued commitment by Congress to achieve actuarially sound rates for risks, a process begun with the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12), but rolled back some in 2014;
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A smoother process for risks that move from the NFIP to the private market and then back again. Currently, NFIP policyholders lose their grandfathering status, and therefore any premium subsidies they might have received, if they decide to buy a private flood policy and then decide to go back to the NFIP; and
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Passage of H.R. 2901, the Flood Insurance Market Parity and Modernization Act (H.R. 2901 in the 114th Congress), which clarifies language in BW-12 and makes clear that lenders may accept privately issued Flood insurance to meet their mandatory purchase requirements.
Various legislators, meanwhile, have their own priorities. Griffin says some members of the House Financial Services Committee would like to see the NFIP's debt forgiven, which he says might not be supported by a majority on that committee at this moment.
Tom Santos, vice president of federal affairs for the American Insurance Association (AIA), says some members in the Senate want to talk about making the NFIP more consumer-friendly, which is not discussed as much in the House.
Other legislators place more emphasis on affordability for low-income homeowners, says Jenn Fogel-Bublick, a spokesperson for SmarterSafer.org, a national coalition representing various interests and industries. "I think there has been a lot of agreement [between legislators and interests in various industries], and there is a lot of common ground. Flood insurance reform, however, is not something that's easy. This is not an easy lift."
Related: Future of Flood Reform?
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(Photo: NUPC)
What would it look like?
Much has been said about steps that can be taken to encourage greater private-market participation in Flood insurance. But what is the ultimate goal for the insurance industry, and what would be the perfect conditions for a thriving marketplace?
Jimi Grande, senior vice president, federal and political affairs for the National Association of Mutual Insurance Companies (NAMIC), says, purely hypothetically, in a world in which Flood insurance could be built from scratch, "I would start with a principle that says rates should always match risk, and risk should always be properly communicated to the consumer."
He adds, "And I think I would try to make sure we didn't develop in places that are too risky." He says building on wetlands and low-lying coastal areas tends to be bad for the environment and a flood risk "that people shouldn't assume. It's not a good idea to build a house in an area we know is going to flood."
The country, says Grande, could be smarter and focus on mitigating or even migrating from coastal risks.
Asked how that would work given the vast economic interests situated in risky coastal areas, Grande points out, "Now, that's practical versus our make-believe world of what it should look like. The problem is we've built this economic reality over the last 40 years. You can't just undo it."
John Dickson, president, NFS Edge, an affiliate of Aon National Flood Services, says, in the ideal Flood insurance marketplace, private companies would have to be responsible citizens. That means, he explains, contributing to efforts such as mapping and mitigation.
Dickson notes that flood on a wide scale is a unique risk that can be influenced by land clearance, development and more. Mapping must constantly evolve to keep up with the changes, and FEMA does not have the manpower to do that by itself. In some cases, flood risks may have long changed in an area covered by a given flood map.
Brady Kelley, executive director of the National Association for Surplus Lines Offices (NAPSLO), offers his vision: "In a perfect world, we believe the private market should be absolutely exhausted before any residual market or government backstops are deployed."
Today, he notes, the NFIP is the primary market, with surplus lines insurers mostly making up a secondary market providing coverages the NFIP cannot. The standard market, he says, largely doesn't exist.
Ideally, he explains, standard carriers would provide primary coverage for most risks, surplus lines steps in as a second tier for consumers who want products that differ from what the standard market provides, and then the NFIP serves as a residual market.
Griffin looks ahead to what Flood insurance could look like in the future with the appropriate reforms today: "I think market will dictate terms, but I think we'll ultimately see a robust private market." He adds that it would probably take a decade before it becomes a more mature marketplace, and he notes that's not the news that some members of Congress who favor a more immediate transfer of risk want to hear.
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The 'Trump Factor'
Of course, in between the positive 2016 discussions and any action on those discussions in 2017 was a contentious national election. Industry representatives say the Trump administration has not weighed in on NFIP discussions yet, but Fogel-Bublick notes Flood-insurance reform has typically been handled by Congress rather than presidential administrations.
During the previous NFIP reauthorization, discussions were derailed and delayed by major outside events such as the financial crisis in 2008. With the early part of the current administration certainly not lacking in major story lines, is there a risk flood might once again be fighting for attention in Washington?
"I am concerned about that," says Griffin. "There are so many things going on right now, it could happen." But he and others note Congress does have an appreciation for the upcoming September deadline, and that will likely keep the NFIP near the top of the list for legislators.
Although the election resulted in Republicans retaining both the House and Senate, there were some changes on key committees. Rep. Blaine Luetkemeyer, R-Mo., for example, whose principles are expected to shape flood discussions this year, is no longer chairing the Housing and Insurance Subcommittee. He was replaced by Rep. Sean Duffy, R-Wis.
Industry representatives expect the subcommittee to build on its work in 2016 despite the change, and Grande says Duffy assuming his new role makes him optimistic. "I can say Chariman Duffy is among the hardest working members of Congress," says Grande. Noting all of the interests involved and their needs and wants for the NFIP, Grande adds, "If this very narrow needle can be threaded, I think he's the guy to do it."
"I'm extremely optimistic about what we have been seeing on a holistic level," says Carolyn Coda, deputy head of Regulatory Risk Management for Swiss Re, noting the House, in particular, has done a lot of work so far.
Whether that optimism will translate into positive action, only time will tell.
The draft
Last year began with two hearings held by the Housing and Insurance Subcommittee of the House's Financial Services Committee in January, and ended with that subcommittee's then-chairman, Rep. Luetkemeyer, releasing a set of well-received draft Principles for Flood Insurance Reauthorization and Reform in December. In between, the Senate held a pair of Flood insurance-related hearings, and industry members say that in general, they had substantive talks throughout the year with legislators in both chambers of Congress.
Luetkemeyer's draft, the culmination of the House subcommittee's work in 2016, contained no surprises for industry representatives, but it encompassed many of the broad principles they support. "I think he's done excellent work," says John Dickson, president of NFS Edge (an affiliate of Aon National Flood Services), adding that the principles clarify the year's discussions and include ideas to ensure a sustainable NFIP.
Luetkemeyer's five general principles include the following:
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An NFIP reauthorization for a defined period of time.
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Improving the program's fiscal situation, in part through greater use of reinsurance and capital markets to transfer risk — a step the program took in September 2016 when FEMA secured its first placement of reinsurance for the NFIP. FEMA later expanded that placement in January by transferring $1.042 billion of the NFIP's financial risk to 25 reinsurers.
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Improving transparency and consumer choice, including industry-supported measures to encourage insurer participation in the marketplace.
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A more open process for NFIP rate-setting.
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Improving mitigation and updating mapping.
"I think it's a realistic list," Griffin says, adding his understanding is that legislation is well into the drafting stage, and he expects most of the ideas in the draft principles to be in included.
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