With thousands of Florida homeowners facing significant increases in their federal flood insurance premiums, state lawmakers are considering ways to open up the market to private insurers.
Industry experts, however, say there are considerable barriers to creating a private market without granting insurers regulatory latitude to develop rates and policy forms.
The National Flood Insurance Program has a current deficit of $24 billion, which federal lawmakers looked to solve by enacting the Biggert-Waters Flood Insurance Reform Act of 2012.
The reforms include new maps that expand flood zone areas where homeowners must carry coverage. The reforms also phase-in higher rates and eliminate subsidies on homes built before 1974 when the first flood maps were put into place.
More than two million Florida properties are covered through the NFIP, representing 37 percent of the total market and over $1 billion in premiums. About 268,000 policies are currently subsidized including 35 percent of policies in the Tampa Bay region.
Senate Banking and Insurance Committee Chair David Simmons (R-Altamonte Springs) said that given the magnitude of the increases expected with new maps and other reforms, it is time to consider a state-specific private market solution to the problem.
Simmons and other lawmakers complain that in the last three years, Florida has paid in $3.60 in premiums for $1 in claims. That makes Florida, which represents 37 percent of the NFIP market, a “donor” state.
“We pay significantly more in premiums than exists in the way of claims and the question is why are we doing that if it is not the only opportunity to solve the problem,” said Simmons.
The $3.60 does not cover the full cost of the NFIP as it does not include administrative or claims handling costs or agent commissions for marketing the policies.
Office of Insurance Regulation Deputy Chief of Staff Rebecca Matthews said regulators are talking to several companies about the possibility of marketing flood policies.
Matthews said that regulators see no reason Florida could not establish its own flood program. However, she noted, with the NFIP reforms already kicking in it is difficult to draw a timeline when such a program would need to be up-and-running to head off the rate increases.
“We are not sure how quickly it will all move,” said Matthews about the NFIP reforms.
Security First Insurance Co. President Locke Burt said that it is unlikely that any private insurer would come forward without having significant leeway when it comes to setting rates and drafting forms.
Burt outlined several obstacles private insurers would face starting with the fact that NFIP has only developed national loss experience data. That means no insurer would have a database to calculate rates, much less one that would allow regulators to judge whether the rates are actuarial sound and conform to state law.
“It is a classic ‘Catch-22,'” said Burt. “Because a private insurer can’t prove the rates, they can’t write it.”
Burt also said that insurers would have to have the freedom to develop underwriting guidelines and policies that would incorporate any deductibles or exclusions. Normally, those would have to be approved by regulators with statutory backing.
That kind of uncertainty, he said, could only be overcome by a trial and error method of the kind that insurers are adverse to.
“If someone came up with a program and started selling it one of two things would happen,” said Burt. “Either if would be priced too cheap and you’d go broke or the price would be too high and no one would buy it.”
Florida Association of Insurance Agents President Jeff Grady said after the meeting that while the lawmakers search for answers to rising flood insurance rates is commendable it ignores several basic insurance and political realities.
Even though Florida may be a “donor” state when it comes to the NFIP, if the rates truly reflected Florida’s catastrophe exposure they would more than likely have to increase, Grady said.
“The reason this is a federal government program is they are the only entity capable of spreading the risk,” said Grady.
The only way to offset that would be to spread the risk to other policyholders such as making it part of every homeowner’s standard multiperil HO-3 coverage.
Simmons also floated the idea of running a flood program through the state’s property insurer, Citizens Property Insurance Corp.
Grady, however, said such ideas would likely set off a political debate that is familiar to those who have witnessed previous debates over windstorm rates.
He said using the property insurer Citizens would require homeowners in non-flood areas to in effect subsidize flood rates. That could be a tough sell in a state where it is already difficult to manage debates between lawmakers in non-coastal areas who believe their constituents should not have to subsidize homeowners in coastal areas.
There is also the ongoing struggle over reducing subsidizes that all state policyholders might have to pay in the event Citizens faces a funding shortfall.
“You would trade one set of problems for even more problems,” said Grady.
Despite the many questions raised about creating a private market for flood insurance, Simmons and other lawmakers said they would not give up their quest to find a private sector solution.
“It seems to me we have to let you guys have the freedom to take a shot,” said Simmons.
Florida is not alone looking to solutions for rising flood insurance costs. Louisiana Treasurer John Kennedy has suggested that his state should consider getting in the flood insurance business.