Insurers Balk as House Panel Votes to Add Wind Coverage to Flood Program

July 27, 2007

Private insurance companies are balking at a decision by a key House panel to expand the federal flood insurance program to include wind coverage.

The House Financial Services Committee voted yesterday to add wind coverage to the National Flood Insurance Program (NFIP).

"We continue to believe that adding wind coverage to the NFIP is not the right solution," commented American Insurance Association (AIA) President Marc Racicot.

AIA commissioned a study by Towers Perrin showing that adding wind could taxpayers as much as $100 billion to $200 billion if the federal government began displacing the private market by providing wind coverage.

At recent hearing, AIA was joined by other insurer groups in opposing the expansion. They included the Property Casualty Insurers of America and the Reinsurance Association of America.

PCI told lawmakers that, while the inclusion of wind coverage within the federal program is well-intentioned, it may produce unintended negative consequences for millions of American insurance consumers.

"Including wind coverage within the NFIP will create artificial subsidies, thereby essentially raising rates for consumers in inland parts of the country who are not subject to the same kind of wind-damage risks faced by policyholders on the coasts," said Ben McKay, PCI's senior vice president, federal government affairs. "It is hard to believe that Congress wants to give more responsibility to a failed government program. I wouldn't invest in a company that had inadequate cash flow and $17.5 billion of debt."

According to PCI, the combination of homeowners' insurance coverage, state wind pools and flood coverage available through the NFIP already provide consumers protection from wind and water damage. Moreover, the current system provides consumers the opportunity to purchase coverage at a price that reflects the risk based on the location of the property and the likelihood of a loss.

"State residual market mechanisms provide wind coverage where there is no market, and private insurers provide wind coverage where there is a market," McKay said. "The Taylor bill simply creates a federal government fund that will compete with existing state funds and potentially with the private sector."

Franklin W. Nutter, president of the Reinsurance Association of America (RAA), also argued that the expansion provision was unnecessary because private sector insurers, reinsurers, capital market participants, and residual market programs already provide wind coverage.

In a letter sent to Chairman Barney Frank, D-Mass., and Ranking Member Spencer Bachus, R-Ala., of the House Financial Services Committee, Nutter said that it "fundamentally alters who bears the risk of loss from wind. Instead of spreading this risk throughout the private worldwide insurance marketplace, this legislation puts the entire burden of deficits on the U.S. taxpayer. This fundamental shift is not needed. There is adequate wind capacity being provided by direct insurers and/or state residual markets, and there is a very robust global private reinsurance market for wind to help insurers manage their risk of loss."

Insurers had hoped lawmakers would have instead pursued a proposed six-month study by the Government Accountability Office, which they said would have provided an analysis of adding wind coverage to the NFIP and provided a better understanding of the real cost of adding wind coverage.

The measure approved by the House Financial Services Committee is H.R. 3121, the "Flood Insurance Reform and Modernization Act of 2007," which also includes other reforms to the NFIP that insurers support.