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A recently passed disaster relief bill will give the National Flood Insurance Program some debt relief but does not include broader reforms to make the program more sustainable, according to a special report by A.M. Best Co. Inc. published Friday.
President Donald Trump signed a $36.5 billion disaster relief bill in October that will forgive $16 billion in program debt. The U.S. Senate adopted the bill on an 82-17 vote, and the U.S. House of Representatives adopted it on a 353-69 vote earlier in the month.
“With the NFIP already $26 billion in debt, the bill’s erasure of the $16 billion the program owes provides a temporary reprieve for its rapidly depleting emergency disaster accounts and keeps it from running out of money to pay for the anticipated deluge of claims from Hurricanes Harvey, Irma, and Maria,” the Oldwick, New Jersey-based rating agency said in its report. “Absent the relief, projected losses from these events would have fully exhausted NFIP’s remaining cash reserves, along with its $30.4 billion in borrowing authority from the U.S. Treasury, leaving it unable to pay claims.”
Congress approved the bill despite concerns from some conservative members, with all 17 no votes in the Senate coming from Republicans, the report noted.
“The new law does not include broader changes to the program that would make it more sustainable; hence, it is viewed by those who opposed it as nothing more than another taxpayer bailout of a failing government program,” Best said in its report. “Many had hoped for what they considered a palatable solution to help the victims of disasters through responsible aid along with lasting reforms to the troubled program. Congress currently has less than two months to decide whether to reauthorize the NFIP amid the clamor of those vociferously calling for a significant overhaul, made especially urgent by the increase in catastrophic storms many feel are related to climate change.”
The NFIP was extended until Dec. 8 as Congress closed in on its scheduled Sept. 30 expiration.
Reform proponents are advocating for provisions that would enable more private insurance participation in covering flood risk, but “until rates are adequate for the risk, private insurers will be reluctant to jump into this market with a meaningful level of commitment,” the report stated.
“A.M. Best believes that, for privatization to be successful, true risk-based premiums need to be achieved,” the agency said.
In addition, reinsurers need to participate, as seen by the NFIP’s successful purchase of $1 billion in reinsurance coverage, according to the report.
“This is a small step, but in terms of dollars, it’s a big step for the program in getting reinsurers to accept this risk,” the report said. “Reinsurers are expected to pay out full loss limits for claims from Hurricanes Harvey and Irma. Unfortunately, losses from these events will likely result in higher reinsurance costs when the program is renewed in January of 2018. Nevertheless, reinsurers will play a critical role in whether private insurers move into this space in any meaningful way.”
Catastrophe modelers such as Boston-based AIR Worldwide and Newark, California-based Risk Management Solutions Inc. are also “making private flood coverage more viable as they continue to refine their own U.S. flood models using the most up-to-date hazard maps, historical data and flood footprints,” the report said. “By using these models, private insurers and reinsurers will be able to develop event-based scenarios for a portfolio of risks. Having access to these models could be key to attracting private insurers, which would allow them to set pricing based on comprehensive data. However, as with wind and earthquake models, validation and market acceptance may not come quickly.”
The failure of an effort to ensure private flood insurance coverage will be deemed comparable to government-provided insurance highlights the ongoing difficulty of reforming the National Flood Insurance Program despite its mounting debt and bipartisan recognition of the need for reform.