Insurers Fight over Flood Policies Dropped by State Farm

Major U.S. insurers are pushing to gain control of 800,000 former State Farm flood insurance policies as lawmakers contemplate reforms to the nation’s flood insurance system.

The conflict began last year when State Farm dropped out of the government’s flood insurance program, leaving behind 800,000 existing policies. That was equal to almost 15 percent of the $3.3-billion flood insurance market.

State Farm’s competitors want to be able to take over the policies, but State Farm has an arrangement with the government that shields them. The struggle over the policies pits State Farm against Fidelity National, Allstate, The Hartford, Travelers and other insurance giants in a struggle that is chiefly about access to policyholders.

As lawmakers and lobbyists maneuvered over reforms, flood waters were rolling down the Mississippi Valley and hurricane season was set to start on June 1, with the National Flood Insurance Program (NFIP) deep in debt and no consensus on fixing it.

Reform legislation is in the works. It has been approved by a U.S. House of Representatives subcommittee, but it faces obstacles, such as the fight over the policies.

The job of cutting through such complications will fall to Rep. Judy Biggert – the reform bill’s chief backer and the chairman of the House insurance subcommittee that approved it – as well as other House Republicans.

Biggert is neutral for now on the State Farm issue. “Her primary interest remains … a reauthorization bill that will put the NFIP back on a secure financial footing and protect taxpayers,” said Biggert’s spokesman.

Flood insurance is not a highly profitable segment of the insurance business, but people who buy it may be willing to bundle in their home, auto and other more lucrative insurance lines. Hence, the struggle over the 800,000 policies.

FEMA-Run Program

The NFIP, run by the Federal Emergency Management Agency, covers more than 5.6 million property owners. Most flood policies are marketed, sold and written on FEMA’s behalf, for a fee, by 85 private insurance firms. The premiums paid by policyholders go to FEMA, which pools them and pays out on claims as needed.

In addition to the part of the NFIP that involves private insurers, FEMA has a small in-house operation, known as NFIP Direct, which it has traditionally used for dealing with problematic policies unwanted by private firms.

The NFIP was inundated with claims from Hurricane Katrina in 2005. A $17.8-billion taxpayer bailout of the program followed, as did a series of investigations, studies and congressional hearings. In the post-Katrina uproar, Congress’ support for the NFIP has wavered. On several occasions, the program has come close to expiring or been allowed to expire before lawmakers voted to renew it, frustrating insurers and real estate interests who count on the NFIP.

State Farm, once the nation’s No. 2 writer of flood insurance, left the program in June 2010, citing its “stop/start” uncertainties. It was the largest pull-out in the program’s 42-year history. FEMA moved the 800,000 State Farm policies into its NFIP Direct operation, instead of letting other insurers take them over.

That move, implemented over a one-year transition, minimized confusion for policyholders and preserved a role for independent State Farm agents in selling flood policies. But it also protected State Farm from competitors, and expanded NFIP Direct well-beyond its original purpose, according to insurers who now want a change.

Cleaver Amendment

An amendment to Biggert’s bill, proposed by Democratic Rep. Emanuel Cleaver, would have moved State Farm policies out of NFIP Direct and into a pool where other companies could compete for them. Cleaver withdrew his amendment at Biggert’s request, however, and its outlook is unclear. State Farm agents were said to be complaining about the amendment to lawmakers, but it still has some support, said aides and lobbyists.

“We urge Congress to adopt measures that will encourage more policies to be administered by the private market and preserve the NFIP Direct program’s original function that handles only complex risks and repetitive losses,” said Ben McKay, a lobbyist for the Property Casualty Insurers Association of America (PCI), an industry group.

The NFIP is scheduled to expire again in September.

Topics Carriers Legislation Flood