Despite Consensus, Politics Stymies Federal Flood Reform

December 8, 2011

In this era of sharp political differences, the need for a national flood insurance program is one area where just about everyone agrees. Even so, the program is a victim of Washington partisanship, actuaries were told at a general session of the Casualty Actuarial Society’s Annual Meeting on Nov. 8 in Chicago.

The flood program is currently slated to expire on Dec. 16. The Senate has approved an extension until May 2012 but the House has not acted on that bill, nor have the chambers agreed on a longer-term measure that includes reforms.

Both political parties agree in great detail on how to extend the 43-year-old National Flood Insurance Program. But inter-party fights have kept the legislation from moving through the Senate, said Jimi Grande, senior vice president of federal and political affairs at the National Association of Mutual Insurance Companies.

Grande discussed the program with Jeffrey Kucera, senior consultant at Towers Watson, and Stuart Mathewson, senior actuary at Swiss Re and co-author of a monograph on the program.

The National Flood Insurance Program began in 1968 after a string of national disasters. People living in the riskiest areas – the 100-year floodplain – must buy flood insurance to qualify for a federally backed mortgage. For others, purchase is optional. A private insurer sells the insurance in conjunction with a homeowners’ policy and handles any claims. But the federal government bears the risk, reimbursing the private insurer for any flood claims it pays.

The program was regularly renewed and extended for four decades. But it has languished in Congress for five years, receiving four temporary extensions. Several times it has lapsed, meaning homebuyers have been unable to close on their homes and government reimbursements slow down.

Aside from the political wrangling, the program’s current troubles stem from some problems inherent in flood insurance and in the federal program, Mathewson said.

Private insurers avoid bearing flood risk, Grande said, because the exposures aren’t independent. A flood that hits one home in a region will hit many. An insurer that writes in that area will not be able to diversify that risk away.

Over the years, the program has become concentrated, with 69 percent of policies written in hurricane-prone states. Thirty-eight percent are sold in Florida, Mathewson said.

Generally, the only people who want the insurance are the ones likely to suffer a flood. One percent of flood policies have had two claims or more, Mathewson said. They constitute between 38 percent of claims. There are 71,000 of these “repetitive loss properties.”

And rates are based on flood maps, many of which haven’t changed in years. If the maps aren’t accurate, Mathewson said, the wrong people are forced to buy insurance. Further, he said, the program doesn’t charge an actuarially adequate rate. Program actuaries calculate what’s called a “full risk” or “actuarial” rate, and do a good job of estimating the expected losses, Mathewson added. But, even that rate is based on the long-term average flood loss, with only a small provision for a “mega-cat” – an extraordinarily large, unprecedented loss.

But that’s not always the rate that’s charged. About 20 percent of the buyers pay a subsidized rate that is 40-45 percent less than the “full-risk” rate. Rates can’t increase more than 10 percent a year.

For its first three decades, the program brought in nearly $20 billion in premiums and paid a similar amount in claims. In 2005, the mega-cat hit: Hurricanes Katrina, Rita and Wilma depleted the program. It had to borrow more than $20 billion from the Treasury to cover claims. Given the program’s current structure, that loan won’t be repaid for decades, if ever.

To fix the program, legislation had to address the debt overhang and the structural problems. Current legislation seems to do that, Grande said.

The measure extends the program for five years, phases in actuarially sound rates and raises the annual limit on premium increases to 20 percent. It also establishes a mapping council to update flood maps – the template upon which actuarial rates are built – and does so in a way that key homeowners, real estate agents and municipalities can share in the process.

The legislation passed the House of Representatives, 406-22, a remarkably bipartisan vote, Grande said. “They can’t pass a pay raise for themselves with 406 votes,” he said. But the bill bogged down in the Senate.

The fate of the flood bill – with wide support from both political parties – is tied in with more contentious issues, like the budget process. Insurance lobbyists say passage of a long term extension – eventually – is likely, but another short-term extension seems more likely when the program next expires in a few weeks.

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