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Mark A. Hofmann

COMMENTARY: NFIP needs to boost premiums to better reflect property risk

December 15, 2013 - 6:00am

It wasn't all that long ago that we were being treated to the recurring congressional spectacle of extending the National Flood Insurance Program for a few weeks at a time. In some cases, the program was allowed to lapse, only to be reinstated retroactively. The result was a classic example of Washington dysfunction at its worst.

Fortunately, lawmakers got their act together and approved the Biggert-Waters Flood Insurance Reform Act of 2012. The legislation extended the program for five years and instituted several significant reforms to the debt-ridden NFIP, including requiring actuarially based rates for coverage, which would allow rates to increase by as much as 25% per year.

In the private insurance sector, using actuarially based rates would raise no eyebrows. In fact, doing so would be considered sound underwriting practice.

But things work differently in the public sector. A little more than a year after the passage of the Biggert-Waters act in July 2012, lawmakers from both parties are backing legislation that would prevent the NFIP from using actuarially sound rates for at least four years. Look at a calendar — that means that the revised rate schedule wouldn't take effect until the NFIP was up for yet another extension.

That policyholders wouldn't want to pay higher rates is understandable; nobody likes to pay more for something when its price has been held artificially low like NFIP rates have been. According to a report issued this year by the Government Accountability Office, the NFIP as of November 2012 owed the U.S. Treasury Department about $20 billion. With that kind of debt involved, this certainly isn't the time to block justified rate increases.

Ideally, the program would be at least partially privatized, as has been urged by the Reinsurance Association of America and the Association of Bermuda Insurers and Reinsurers. The Federal Emergency Management Agency, which oversees the NFIP, is expected to issue a report on privatization in the not-too-distant future. But any privatization efforts would take years to materialize.

If some members of Congress have their way, charging realistic rates for NFIP coverage will take years to accomplish. That's not fair to taxpayers, who are indirectly subsidizing coverage for NFIP policyholders in flood-prone areas. Postponing justified rate increases doesn't do anything for the federal debt, either.

There will be hardship cases as a result of the new rate structure. But those should and can be dealt with on an individual basis. And under some circumstances, actuarially sound rates could signal that a property never should have been developed in the first place because of the severe nature of its exposure.

Postponing the levying of sound rates on NFIP policies will accomplish nothing beyond giving temporary relief to some policyholders while undermining reform of the program. Without reform, the program can only be expected to go deeper into debt, with the taxpayers ultimately picking up the tab.