Convincing private insurers to get back into the U.S. flood insurance business would require concrete actions by both federal and state lawmakers, according to a report issued Tuesday by Deloitte Services L.P.'s Deloitte Center for Financial Services.
The report, “The potential for flood insurance privatization in the U.S. — could carriers keep their heads above water?” noted that Congress recently rolled back a series of reforms to the National Flood Insurance Program involving risk-based rates and subsidies for some properties insured under the debt-ridden federal program. The report said that for private insurers to return to the market in a major way, legislators would have to “create an environment in which carriers are given enough flexibility to underwrite and price coverage for a reasonable return on the risks they are being asked to assume.”
The report suggested that exempting rates from state rate regulation would “go a long way in making sure carriers have the ability to charge an actuarially-determined price for the flood risks they insure.” It added that if risk-based rates were believed to make the coverage unaffordable for some high-risk property owners, subsidies would probably be the responsibility of state and federal governments.
It also said that governments could help lower exposures by taking more risk management actions, such as adopting and implementing best practices for construction, as has been recommended by the Federal Insurance Office.
The report noted that for privatization to work for insurers, carriers would “likely at a minimum have to be allowed to scientifically assess risks and price them accordingly, so there are adequate funds available for claims payments, even in worst-case scenarios.”