Congress to consider privatizing the NFIP

Privatizing the National Flood Insurance Program could mean higher rates but better coverage for flood insurance policyholders, market observers say.

They also say that any privatization of the debt-ridden program, which was reauthorized for five years last year, would have to be phased in after considerable discussion to avoid market disruption. The program came under increased scrutiny as losses from Superstorm Sandy mounted. During the House debate over financial relief for Sandy victims this month, the chairman of the House Financial Services Committee, Rep. Jeb Hensarling, R-Texas, called the program “ineffective, inefficient and indisputably costly to hardworking American taxpayers.”

Rep. Hensarling said the committee “will take up legislation to transition to a private, innovative, competitive, sustainable flood insurance market.”

The Risk & Insurance Management Society Inc. noted that Congress has called for studying whether the program should be partly or fully privatized.

“More than just extend the program, RIMS applauds our representatives in Washington for taking the foresight to authorize studies on the privatization of flood insurance,” Carolyn Snow, RIMS' secretary and liaison for external affairs and director of insurance and risk management at Humana Inc. in Louisville, Ky., said in an email. “We believe that these studies should be completed in order to determine whether privatization is a viable option. Prematurely abandoning the NFIP would leave many homeowners and businesses exposed to the perils of floods and would throw the marketplace into flux.”

Frank Nutter, president of the Washington-based Reinsurance Association of America, noted the idea of privatizing part or all of the NFIP is not a new one.

“We're delighted to see Chairman Hensarling raise the idea that this needs to be more fully explored,” he said. He added that the Federal Emergency Management Agency, which oversees the NFIP, took an initiative to examine private sector options some time ago.

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Rep. Hensarling's pledge drew praise from the free market-oriented R Street Project, which holds that flood is an insurable risk and should thus be left to the private market. Ray Lehmann, senior fellow at the Washington-based nonprofit, also noted that while privatization could lead to higher costs, it also could mean broader coverage.

“There's no doubt rates would have to rise above what the flood insurance program charges,” said Mr. Lehmann. “But the other side is that the flood insurance program is not all that generous; it doesn't even offer business interruption. Having it be a private program, you could go to your traditional primary carrier and have a robust package put together that integrates all of the terms from dollar one.”

He said privatization would require “a good deal of discussion and thought and it would take time to both craft the legislation and provide for a transition to a private market.”

Charles Symington, senior vice president of the Alexandria, Va.-based Independent Insurance Agents & Brokers of America, said in an email that the group was happy to work with Rep. Hensarling on NFIP reform, but he also cautioned that “it is important that any such reform take into account the 5.6 million American consumers who rely on the NFIP for flood risk protection as well as the difficulty the private market historically has had with offering this coverage.”

“I believe that, looking at his comments, that (Rep. Hensarling) believes the private sector can play a larger role in flood insurance,” said Nathaniel Wienecke, senior vice president in the Property Casualty Insurers Association of America's Washington office. “The question is what would it take for the private market to engage in a different way in the flood insurance market. It may provide policyholders with broader protection; however, the cost would be significantly higher because the industry would have to charge rates that were actuarially sound.”

“To try to explore whether or not there's any more capacity in the private market, you first have to create a market where risk-based rates exist,” said Jimi Grande, senior vice president in the Washington office of the National Association of Mutual Insurance Cos.

Mr. Wienecke also noted that insurers are regulated at the state level. “To the extent that P/C companies would be providing insurance in a different way than NFIP and would need to charge higher rates, those rates are regulated at the state level,” he said.