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Market ready to offer flood coverage as NFIP awaits reauthorization

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Private insurers and reinsurers are eager to take on more U.S. flood risk in their portfolios, especially if Congress can reauthorize the National Flood Insurance Program in a way that allows for expanded private-sector participation.

“The private capital markets today are very excited about flood, clearly more so than they ever have been,” said John Dickson, president of NFS Edge Insurance Agency Inc., an affiliate of Aon National Flood Services, in Kalispell, Montana. “They’re looking to match the risk with their businesses and see how it meshes with other catastrophe programs they write. For example, for insurers heavy in the windstorm markets, particularly in the Gulf and south Atlantic coast, it’s a little difficult for them to fit hurricane-driven flood into their portfolios, but they’re very interested in looking at flood in other parts of the country.”

Legislative proposals introduced in the U.S. House of Representatives and Senate ahead of a pending Sept. 30 expiration would extend the program five or six years, with growing expectation for a short-term “as is” reauthorization to give legislators more time to reach consensus on a bill that can pass both bodies.

However, the Risk & Insurance Management Society Inc. is trying to impress on legislators the importance of reauthorization prior to the expiration.

A failure to do so would be “extremely devastating” because many mortgages, leases and other agreements specifically require an NFIP policy and force people to “breach contracts through no fault of their own,” said Elizabeth Guimaraes, chair of the RIMS External Affairs Committee and director of risk management for Nova Southeastern University in Fort Lauderdale, Florida.

A program lapse would also leave commercial and residential insurance buyers vulnerable to a catastrophic event for which they would be uncovered, she said.

“As an owner of one of those policies, I’m now having to come up with $500,000, and that’s not an easy thing for everyone,” Ms. Guimaraes said, referring to the NFIP’s form offering commercial policyholders coverage for building or personal property up to $500,000. “And that’s only if it’s one building. If you’ve got multiple buildings, you’re really stuck.”

The private sector has voiced overall support for reauthorization, but stakeholders favor provisions featured in bills adopted by the House Financial Services Committee in June.

The House reform package included the bipartisan 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’re trying to obtain federally backed mortgages that require flood insurance.

Absent this clarification, lenders have been confused about what private coverage can be accepted for mandatory purchase requirements.

“That clarification needs to happen so people aren’t hurt by virtue of joining the private market,” 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.

The bill 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.

The reform package would also eliminate the noncompete clause, meaning elimination of the regulatory restriction that currently prevents insurers participating in the NFIP’s Write Your Own program from selling both NFIP and private flood insurance policies.

“It is critical that the Write Your Owns are able to offer it,” said Keri Kish, director of government relations for the Wholesale and Specialty Insurance Association in Kansas City, Missouri. “If those insurance companies participating as Write Your Owns are unable to participate in the private market with private market solutions, then you can’t fully develop that market.”

A more contentious bill would require the use of replacement cost value in determining premium rates for coverage under the National Flood Insurance Act, with the bill passing the House committee in June on a 34-25 vote.

“We think that’s an important provision in bringing the NFIP along the glide path to premium adequacy,” said Tim Brockett, senior vice president and manager of strategic products for Munich Reinsurance America Inc. based in Princeton, New Jersey. “The private market is only going to come in in a big way if the private market feels it can make some money on the business. The rates have to be adequate.”

But there are concerns private insurers will “cherry-pick” the most attractive risks, leaving the NFIP saddled with the responsibility of covering the riskier properties and locations.

“It’s not (cherry-picking) because the markets that they want to write are sometimes the most challenging and risky markets, because that’s where the premium is,” Ms. Bordonaro said. “They can take out some of the higher-risk structures and place it privately and still save the consumers money.”

And the Alexandria, Virginia-based National Association of Professional Insurance Agents objected in June to a proposal by the House committee to reduce the reimbursement rate for Write Your Own insurers to 27.9% from 30.9%.

Ms. Bordonaro suggested any decrease in the Write Your Own insurers’ compensation structure only occur on policy renewals rather than new policies.

“It is a very high-commissioned business — I’m not going to say it’s not, but it’s also one of the most difficult policies for agents to write, explain, sell properly,” she said.

Insurers have new technology and data sources allowing them to take a more granular look at flood risk, which may benefit some buyers who receive lower rates, and they can insure risks not typically covered by the NFIP. A new program launched last month by ISO, a unit of Jersey City, New Jersey-based Verisk Analytics Inc., enables insurers to set their own limits and provide optional coverage for typically uncovered risks such as property damage to basements and business interruption.

“There’s ample capacity available to write flood in the United States just sitting there waiting to be deployed,” said Tom Dawson, a New York-based partner and co-chair of the insurance regulatory and transactional team at law firm Drinker Biddle & Reath L.L.P. “It’s not a pipe dream.”