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US Flood Program Expanded as Lawmakers Deliberate Larger Private Role

As lawmakers continue to look at bolstering private-sector opportunities for flood insurance, the National Flood Insurance Program is still directly administering hundreds of thousands of policies formerly handled by State Farm...

Copyright:(c) 2011 A.M. Best Company, Inc.
Source:A.M. Best Company, Inc.
Wordcount:564

As lawmakers continue to look at bolstering private-sector opportunities for flood insurance, the National Flood Insurance Program is still directly administering hundreds of thousands of policies formerly handled by State Farm.

State Farm Fire & Casualty Co. announced its withdrawal from the flood program in June 2010 (BestWire, June 8, 2010). When it formally left in September of last year, it had 786,552 flood policies. Since then, some 731,000 have been transferred to the NFIP. The remainder will be transferred over the next few months, State Farm spokesman Phil Supple said. The federal program has a total of 5.5 million policies.

Approximately 90% of standard NFIP policies are sold and serviced by property/casualty insurance companies in their own names through the Write Your Own initiative. About 90 private insurers currently participate in the program, under which they receive compensation for writing and administering policies to property owners and renters but bear no actuarial risk. The NFIP retains responsibility for underwriting losses.

The State Farm policies remain under administration of the NFIP's Direct Side Program, which has renewed 530,000 policies to date, according to the Federal Emergency Management Agency, which oversees the NFIP. FEMA is planning to provide information to policyholders about the option to have a policy written by a WYO-participating insurer, spokeswoman Mary Olsen said.

The NFIP is moving too slowly for some in the insurance industry. FEMA should be acting to move the State Farm policies to private WYO companies as soon as possible, not renewing them under direct administration, said Ben McKay, senior vice president of federal government relations for the Property Casualty Insurers Association of America. FEMA needs to depopulate the program, not add to it, he said.

"It's probably the largest increase in any program in all of government in the past year," McKay said.

A provision in an NFIP reform bill now on the House floor would require FEMA to plan how it can limit the percentage of flood insurance policies it directly manages to not more than 10%. While that is about the level FEMA typically maintains, developments like the State Farm pullout make formal measures necessary, McKay said. State Farm could have acted differently and made the policies it administered available to other insurers, but it chose not to, he said.

When it withdrew, State Farm followed proper procedures, Supple said. Thousands of State Farm agents have enrolled with the NFIP direct program to write policies in order to provide an orderly transfer, he said.

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"That was the option we chose," Supple said.

The 2010 State Farm withdrawal, announced during a hiatus in the program while lawmakers argued over its renewal, is an indication of a flood program full of problems, from mounting debt to a lack of operational actuarial standards, said Robert Hartwig, president of the Insurance Information Institute. "The State Farm decision a year ago was a statement about the market," he said.

The NFIP is now set to expire Sept. 30. HR 1309 would renew the program for five years, take steps to reflect actuarial costs, tie policy limits to inflation and expand opportunities for private insurers to participate. The bill also includes measures to improve the accuracy of flood maps and to set higher deductibles for rate-subsidized properties.

State Farm Fire and Casualty Co. has a current Best's Financial Strength Rating of A+ (Superior).

(By Sean P. Carr, Washington Bureau Manager: sean.carr@ambest.com)



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