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Harvey may spur short NFIP reauthorization to avoid claims disruption

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Tropical Storm Harvey is likely to give additional momentum to a short-term reauthorization of the National Flood Insurance Program that could include certain proposals that have widespread bipartisan support. 

But that extension would be designed to reauthorize the program prior to Sept. 30 so the program does not expire while Harvey claims are still coming in, with the NFIP’s longer-term challenges waiting until Congress has more time to consider them, according to experts.
Both houses of Congress are scheduled to be back in session on Tuesday.

“I do believe our representatives will almost be obligated to at least do the temporary reauthorization,” said Janet Bordonaro, flood underwriting manager for Flood Advantage Partners, a member of managing general underwriter and wholesale broker Advanced E&S Group, based in Bonita Springs, Florida.

“There’s no question in my mind that there will be no choice in that matter because claims cannot be paid once (the program) goes away,” Ms. Bordonaro said. “This is not a short-term storm. It takes a very long time to process claims and get payments out the door, and for the Write Your Own (insurers) to be able to focus 100% on that is going to be a challenge while also considering the reauthorization terms and conditions to move the program forward for an extended period of time. I would be shocked if they did a long-term extension unless there were some caveats put in on being able to have the authority to make changes during a reauthorized period.” 

The Property Casualty Insurers Association of America called on Wednesday for at least a six-month extension of the NFIP to allow the Federal Emergency Management Agency to deal with Harvey claims. House Financial Services Committee Chairman Jeb Hensarling, R-Texas, had a package of reform bills adopted by his committee in June ready for consideration by the full House, but he is now calling for a three-month extension.

Don Griffin, PCI’s vice president for personal lines, said the organization would prefer a longer extension beyond three months, as Harvey claims will still be coming in around that time, but he predicted Congress would act this month on a short-term extension despite competing priorities such as an increase to the debt ceiling. 
“Had Harvey not occurred, it might have been a little different story, but I think this puts additional pressure on it because everybody is watching,” he said. 

The short-term extension should provide for the borrowing authority necessary to pay claims — FEMA currently has $5.8 billion in borrowing authority, a number that could be outstripped by the Harvey losses the program must cover — and include the Flood Insurance Market Parity and Modernization Act, which clarifies that people who buy private flood insurance should receive the same treatment as those who purchase it through the NFIP if they are trying to obtain federally backed mortgages that require flood insurance, according to PCI. Absent this clarification, lenders have been confused about what private coverage can be accepted for mandatory purchase requirements.

The bill also specifies that consumers who choose to leave the NFIP to purchase private insurance won’t lose continuous coverage status if they have either an NFIP or private policy, which stakeholders say is critical to ensuring consumers aren’t unfairly penalized for shopping for better policy options in the private market. 

“For us to move forward, it’s essential that the consumer not be punished for going to the private sector,” Ms. Bordonaro said. 
Mr. Hensarling said he would like to include the market parity bill in a short-term extension as it is a source of rare bipartisan agreement, unanimously passed by the House committee in June and adopted by the full House unanimously last year. 

Preliminary reports from PCI member companies and vendors indicate that property losses will fall in the range of $1 billion to $4 billion, Mr. Griffin said.

“The windstorm damage was not nearly as severe as you might expect, mainly because it made landfall as a (Category) 4, but not in a huge populated area and then quickly turned into a Category 1 windstorm-wise,” he said. But PCI expects the number of NFIP claims to exceed 75,000, Mr. Griffin said. 

“With the number of claims coming in and the damage that’s been done, the flood insurance costs may be as high as those from Sandy,” he said. Superstorm Sandy resulted in $8.4 billion in NFIP payouts as of January 2017, second only to 2005’s Hurricane Katrina with $16.3 billion in payouts.

In Harris County, Texas, where Houston is located, there are nearly 240,000 NFIP policies with a total insured value of more than $70 billion as of June 30, according to FEMA data.

“Obviously, it’s not going to be a total loss to every single policy, thankfully, but even if it’s only about 15% of the total amount, you’re talking about a $10.5 billion hit to the program, which would clearly push it over the borrowing limit,” said Steve Ellis, vice president of the Washington-based Taxpayers for Common Sense, a nonpartisan budget watchdog group. “That’s one of the things Congress is going to have to deal with. These are obligations. These are contracts the NFIP has with people and is going to have to pay those out. But at the same time, it really puts more pressure on the idea that this is a broken program that needs to be reformed, that we simply cannot have it just continue as is.”

Another bill, sponsored by Rep. Nydia Velázquez, D-N.Y., that would make administrative reforms to the NFIP in response to abuses reported during the Sandy aftermath was unanimously adopted in June by the House committee and could be included in a short-term extension, Mr. Ellis said. But there is reportedly lingering resentment among the congressional delegation in affected Sandy areas because of funding roadblocks put up by lawmakers in Texas whose constituents are now impacted by Harvey, although they have pledged not to respond in kind. 

“I hope lawmakers will be bigger than some of the petty differences that have divided them in the past, and certainly we’re going to call on the people to get this done and try to hold people accountable to that,” Mr. Ellis said. 

But the short-term extension is unlikely to address some of the program’s longer-term challenges, including its limited penetration across the nation, with Florida, Louisiana and Texas accounting for 56.9% of the policies purchased in the NFIP, according to experts. 

Congress should specifically consider the impacts that a lack of insurance has on small and medium-sized businesses — a vital part of the U.S. economy, said Benjamin Collier, assistant professor in the Department of Risk, Insurance and Healthcare Management of the Fox School of Business at Temple University in Philadelphia.

A research report that he co-authored following Superstorm Sandy found that about 29% of these businesses in the New York area experienced damaged assets and operational disruption for which they had no insurance of any kind. In addition, insured businesses often did not have coverage for the kinds of losses that Sandy created: 74% of businesses with property insurance, 72% with business interruption insurance and 52% of businesses with flood insurance reported that none of their losses from the event had been covered by their insurance, according to the research paper published in March. 

“They were not likely to have insurance in place before Sandy, and then after Sandy they were especially likely to face credit constraints,” he said. “I think some of these challenges are really relevant for Harvey. Less than 10% of businesses that were negatively affected by Sandy had flood insurance and, like Sandy, the main losses from Harvey seem like they’re going to be from flood.” 

But even for businesses with NFIP coverage, commercial policyholders can only secure coverage for building or personal property up to $500,000, and the program does not cover risks such as business interruption. 

“Getting your business up and running when a large portion of your customer base is gone is a major challenge,” Mr. Collier said. “It really depends on some of the specific details of the business interruption contracts. In many cases, we can expect their flood losses probably won’t be covered to a degree where it makes them whole. I think it’s something we should be thinking about with the reauthorization of the National Flood Insurance Program.”