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Winds of change blowing in for NFIP

Posted On: Jun. 6, 2017 7:00 AM CST

As the hurricane season starts to heat up, so does the debate about reforming the National Flood Insurance Program.

The Atlantic hurricane season officially began June 1, according to the National Hurricane Center. Meanwhile, a congressional panel is set to address extending and reforming the NFIP later this week.

Fort Collins, Colorado-based Colorado State University on Thursday increased its forecast for hurricane activity in 2017 to predict average storm activity, with near-average probability of a major hurricane making landfall along the United States coast and the Caribbean.

Increased expectations for hurricane activity could be a concern for policyholders currently in the renewal cycle, and they will have key questions to answer, said John Gibbons, Washington-based partner in the policyholder-only insurance coverage practice of Blank Rome L.L.P.

“Do I have the right limits in place?” he said of those questions. “Do I have the right insurance in place, not just property coverage, but sufficient business interruption insurance coverage? Am I protected in my supply chain with contingent business interruption insurance?”

The National Oceanic and Atmospheric Administration’s hurricane outlook is predicting the development of 11 to 17 named storms, with five to nine reaching hurricane status and two to four becoming major hurricanes. The forecasters predict a 45% chance of an above-normal season, 35% chance of near-normal activity and only a 20% chance of a below-normal season.

Earth Networks, a Germantown, Maryland-based weather information provider, has not changed its forecast of nine to 13 named storms this season, but is monitoring the potential development of El Niño conditions, which typically result in below-average storm activity, said Julie Gaddy, senior meteorologist. Earth Networks is also monitoring the Atlantic Multidecadal Oscillation, which affects sea surface temperatures.

“Water temperatures across the Atlantic are favorable for any storm that does get organized to become a little bit more intense,” she said. “Say you have tropical storm, it moves over the warm water, it would have a little bit better chance to intensify to a hurricane than if it just passed over neutral water temperature conditions.”

“Typically, the three-month period of August, September and October are the most active months for the Atlantic Ocean basin in terms of tropical storm and hurricane activity,” she continued. “If we don’t have the strong El Nino or El Nino-related shear in place during those months, that could be the most active period that we anticipate this summer.”

Irvine, California-based property information provider CoreLogic’s 2017 Storm Surge report, released last week, showed that nearly 6.9 million homes along the Atlantic and Gulf coasts are at potential risk of damage from hurricane storm surge inundation, with a total reconstruction cost value of more than $1.5 trillion.

“The numbers are huge because they are totals … but the fact of the matter is a single storm is not going to do all that damage,” said Thomas Jeffery, CoreLogic’s senior hazard scientist based in Madison, Wisconsin. “But a single storm is going to affect a small area and have a really high impact. We’ve seen the damage from even a Category 1. We haven’t had a Katrina since ‘05, but the situation is there that any given year you can have those catastrophic storms.”

“When a storm doesn’t make direct landfall, there will be insured losses, but the private insurance market isn’t as affected as the federal program,” said Christopher Grimes, Chicago-based director, Fitch Ratings Inc.

Flood insurance backstop reform talks moving forward

The House Financial Services Committee is holding a hearing on Wednesday about a series of proposals to revamp and reauthorize the National Flood Insurance program for five years.

“We see the likelihood of the NFIP being reauthorized in 2017 as very high,” Mr. Grimes said. “The thing we’re looking for is the extent to which private insurers are going to be encouraged going forward to take part of the risk out of the hands of the NFIP. I think the likelihood that the private market will be involved in flood insurance will grow, but the National Flood Insurance Program would still be the dominant presence in the market.”

Barriers to private market entry into the flood insurance market include the lack of sharing of claims data from the NFIP, he said.

“To the extent that information could be shared with the private markets, the better understanding of risk would encourage private insurers to take more of a stake in flood insurance,” Mr. Grimes said. “The inclusion of private insurers as part of federally mandated loan programs and mortgage lending requirements is something that typically would be confined to the NFIP right now. But if private insurers could be included as well, that would likely encourage private market insurers to take a bigger stake in the flood insurance program.”

“On top of that,” he said, “being able to charge actuarially sound pricing that would allow the insurers to be able to produce profitable business going forward and charge the correct amount of premium for the type of risk the insurers would be taking on would be key.”

The capital strength for domestic property/casualty insurers is currently “very strong,” as demonstrated by the aggregate policyholders’ surplus growing in 2016 by 3.1% to $713 million, but the occurrence of a major catastrophic hurricane could potentially have a significant effect on insurance industry capital, according to a report released by New York-based Fitch last week.

“For a significant deterioration to happen in profitability and industry surplus, you would need a storm that represented 15% of industry surplus to be a meaningful loss for the industry,” Mr. Grimes said.