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Struggling NFIP staggers under Harvey

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Tropical Storm Harvey is going to drive the National Flood Insurance Program even deeper into debt — but how much further is yet to be determined, according to experts.

The NFIP is already in debt to the tune of $24.6 billion, thanks to previous catastrophe losses such as hurricanes Katrina and Matthew.

“This is obviously going to be a big hit for a program that’s already massively in debt, and I think that raises the ongoing question of how the NFIP finances their very severe loss years, which are getting to be more and more frequent,” Carolyn Kousky, director for policy research and engagement at the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania in Philadelphia, said Tuesday. “The reinsurance that they have in place will certainly be part of the answer. But beyond that, the program is not pricing right now to cover loss events like these. There’s no way it’s going to repay its debt. It’s time to rethink the financing for these severe loss years.”

“What it is going to be after this event — another $25 billion?” Tom Dawson, a New York-based partner and co-chair of the insurance regulatory and transactional team at Drinker Biddle & Reath L.L.P., said Tuesday. “I think that would be unacceptable to most people.”

The program has $1.7 billion available to pay Harvey claims and $5.8 billion in borrowing authority, not including additional resources that reinsurance may provide, according to the Federal Emergency Management Agency.

“The National Flood Insurance Program is committed to paying every claim resulting from Hurricane Harvey and making sure every policyholder receives what they are owed,” the agency said in an emailed statement. “We cannot speculate on possible impacts of Hurricane Harvey, subsequent claims for properties in the National Flood Insurance Program and what that would mean for the NFIP borrowing authority at this time.”

FEMA piloted a reinsurance program for 2016 for the program and secured a new placement effective Jan. 1, 2017, through Jan. 1, 2018, through a consortium of 25 reinsurers arranged through Guy Carpenter & Co. L.L.C. Under the agreement, the reinsurers agreed to indemnify FEMA for flood claims on an occurrence basis. The layer is structured to cover 26% of losses between $4 billion and $8 billion. A combined total of $1 billion of the NFIP’s flood risk was transferred to the private reinsurance market through this agreement.

“We have not yet determined if our reinsurance program will come into play, however we have communicated with all 25 reinsurance companies to let them know we are closely monitoring this event,” a FEMA spokeswoman said via email. 

“I think that layer is a total loss,” Mr. Dawson said. “But that’s what the reinsurance market is there for. This is a minor loss in the great scheme of things. We’re talking about an industry, depending on how you count, that has between $500 billion and $600 billion of capital. This is a billion-dollar loss. It’s nothing, realistically. There is a lot more capacity available. Obviously, people pay attention to the price. But there is capacity to issue the kind of coverage that a Houston might need.”

The NFIP currently has approximately 444,000 NFIP policies in potentially affected counties in Texas and over 490,000 policies in Louisiana, according to FEMA. As of June 30, there were 593,115 NFIP policies in force overall in Texas, with written premiums in force valued at $364 million, according to FEMA data. In Louisiana, there were 491,316 policies in force as of that date, with written premiums in force valued at $352.7 million. Texas and Louisiana rank second and third, respectively, in terms of overall NFIP policies purchased, following Florida.

“I think there will be large amounts of claims coming into the NFIP,” Ms. Kousky said. “We’re obviously talking about billions to the NFIP. On the one hand, it’s going to be a huge hit to the program, and it will be interesting to see whether it requires them to increase their borrowing authority. It might have to do it with whether the reinsurance kicks in or not. But the flip side is that it’s only a small portion of the flooded homes, so the uninsured flood damage is going to dwarf the insured flood damages.”

The agency was unable to provide estimates of the number of commercial policies in the affected areas as of deadline. But the average NFIP commercial flood claim was nearly $89,000 during the 2010 to 2014 time period, according to FEMA data.

In addition, a U.S. Government Accountability Office analysis showed that 35.6% of commercial policies in the NFIP database purchased the maximum coverage of $500,000 for buildings, while 10.9% purchased the maximum coverage of $500,000 for contents, as of Sept. 30, 2012. The percentage of commercial policyholders who purchased maximum coverage for both buildings and contents was 8.3% at that time, according to the GAO.

Another critical question is whether the devastation caused by Harvey will have any impact on providing new momentum for the discussions on reauthorizing and revamping the NFIP. Prior to Harvey, the growing expectation was that Congress would adopt a short-term “as is” reauthorization to give legislators more time to reach consensus on a bill that can pass both bodies, given all the competing issues Congress must contend with next month, including a bill to continue funding the government beyond Sept. 30 and a vote to increase the debt ceiling.

“Where does flood insurance reform rank among all these other issues?” Mr. Dawson said. “As weeks go by, it’s going to fade. But this is important. If you’re living in Houston, I can’t even imagine what it’s like trying to recover. Maybe this will — in a way Katrina really didn’t accomplish — be the event that really gets Congress to focus. Maybe. I wouldn’t put a lot of money on that.”

The private sector is already coming up with responses to the disaster, with Aon Risk Solutions launching Aon Flood Secure to provide replacement coverage to U.S. organizations that have impaired or exhausted aggregated flood limits on their property policies. The policy, which is not intended to replace NFIP coverage, is designed to provide limits of $25 million or more, can include high-hazard flood zones and will provide pro-rata pricing for reinstated limits and terms of less than 12 months for subsequent or future events, Aon Risk Solutions said Tuesday in a statement.