Expanding Flood Insurance Options: Good Idea?

Expanding a federal program that is already $17 billion in debt might seem like a non-starter of an idea on budget-conscious Capitol Hill these days.

However the idea is included in a Republican proposal to reform the National Flood Insurance Program (NFIP) drafted by Rep. Judy Biggert, R-Ill., chair of the Insurance, Housing and Community Opportunity Subcommittee of the House Financial Services Committee.

The proposal contains a provision instructing the NFIP to add two new insurance products to its portfolio: additional living expenses (ALE) coverage of up to $5,000 for homeowners and business interruption (BI) coverage worth $20,000 for commercial property owners.

The tacking on of these optional coverages is one of the more controversial features of Biggert’s overall proposal.

Agent and other insurance industry advocates maintain that the extra coverages would not exacerbate the NFIP’s current $17 billion debt situation but taxpayer and conservation groups say it could just make a bad situation worse. Business interests argue that the new features will bring in more customers and help the program shore up its finances. Only about 20 to 30 percent of property owners who should obtain flood coverage actually buy it.

Proponents maintain that the expansion would not contribute to financial woes because the NFIP would be required to charge cost-based actuarial rates for the new coverages and the agency would not be able to borrow from Treasury to cover the exposure. Also, the NFIP could only offer the extra coverages when there is no private market available.

Independent agents who deal directly with those who suffer flood losses say BI coverage, which protects against the loss of profits and continuing fixed expenses due to an interruption in operations, is important. “If a flooding catastrophe causes a business’ premises to be temporarily unusable, that business may have to relocate or even close down temporarily. Property owners are still required to pay employees, mortgages, leases and other debts during this process, and these ongoing expenses can mount up quickly for a business on reduced income or no income at all,” Connecticut independent agent Spencer Houldin told House committee members.

Houldin, representing the Independent Insurance Agents and Brokers of America, or the Big “I”, on Capitol Hill, said the coverage would help more than the individual business owners.

“The inclusion of an optional business interruption provision will provide stability to the local economies in the areas affected by flood damage and will offset government disaster relief payments should the flood peril result in widespread destruction across a region,” Houldin said.

Additional living expenses coverage helps pay for hotel, food and replacement clothes when someone has to relocate due to a flood. The arguments for letting NFIP offer the ALE coverage for homeowners are similar to those for adding BI. Insurers also note that the ALE option would bring NFIP in line with what is available to homeowners under private flood policies and state windstorm plans.

“This provision will provide consumers with greater security during the often bewildering post-flood period, and will do so on an actuarial basis as opposed to relying solely on FEMA grants and assistance,” said IIABA’s Houldin.

Other supporters argue that having more policyholders covered for these losses could help reduce federal spending in communities declared disaster areas after flooding.

However, the idea of letting the NFIP offer two additional coverages when it hasn’t been able to pay for the basic coverage it now offers makes no sense to the watchdog group, Taxpayers for Common Sense.

“While the draft legislation directs the Administrator to not provide the coverage if a competitive private insurance market for it is available, we have learned from federal flood insurance itself that the best way to stifle a private market is to have the federal government provide the same product,” said Steve Ellis, Taxpayers for Common Sense.

The government’s own watchdog agency, the Government Accountability Office (GAO), which has for years placed NFIP on its list of high-risk agencies because of its debt, management and structural challenges, also questions the wisdom of adding the BI coverage to NFIP’s portfolio.

The GAO found business interruption coverage for flood losses is generally available in the private market only for businesses that have a policy that includes flood coverage. It also found that the coverage is expensive and is typically purchased only by large companies. While adding business interruption insurance to NFIP could help small businesses obtain coverage that they could not obtain in the private market, the GAO says NFIP currently lacks resources and expertise in this coverage in which the underwriting, pricing and claims adjusting are complex.

Topics Agencies Flood