I.I.I. President Hartwig Says Adding Windstorm Coverage to NFIP Is Potentially Costly;

Closing Flood Insurance Gap Is Key

WASHINGTON, D.C., July 17, 2007 —The number of Americans purchasing National Flood Insurance Program (NFIP) policies to protect their properties and personal possessions from flood-related damages would likely decrease if the NFIP were also to offer windstorm coverage, according to testimony delivered today by Dr. Robert Hartwig, president and chief economist for the Insurance Information Institute (I.I.I.). Hartwig appeared before the U.S. House subcommittee on Housing and Community Opportunity to discuss the Multiple Peril Insurance Act of 2007, House Resolution 920.

“In many parts of the United States, wind is the most frequent and costly cause of catastrophic loss. Consequently, any federal government program established to assume windstorm risk anywhere in the United States must be prepared to adjust, manage and pay losses of a scale and magnitude that are without precedent,” Dr. Hartwig stated. The vast majority of windstorm losses today are paid by private insurers, including in coastal areas, he said.

“While H.R. 920 requires that [NFIP] rates be established on an ‘actuarial basis,’ government operated insurers have historically had very little success in realizing that goal. The financial consequences have been nothing short of disastrous,” Dr. Hartwig noted. “The National Flood Insurance Program itself currently has a deficit of $17.5 billion, according to the Congressional Budget Office. Of the 31 state Fair Access to Insurance Requirements (FAIR) plans for which data are available, 26 have incurred at least one operating deficit since 1999.” Dr. Hartwig added that both beach and windstorm FAIR plans have had similar experiences. FAIR plans are the property insurers of last resort in most states. Their deficits, and those incurred by the NFIP, are usually closed through a combination of assessments, borrowing and taxes.

“Practical experience has demonstrated repeatedly that government-run property insurers have rarely operated on an actuarially sound basis and for political reasons are unlikely to do so in the future. The effect is to enable and encourage rapid development in vulnerable areas that will inevitably drive up the size of future deficits, financed to a great extent by policyholders and taxpayers unconnected to the events that actually gave rise to the loss, perpetuating a vicious and expensive cycle,” Dr. Hartwig said.

Moreover, Dr. Hartwig noted that just 49 percent of homeowners in U.S. flood zones purchase NFIP policies, and only 1 percent of homeowners outside flood zones have flood insurance.

“Because the wind coverage provision in H.R. 920 is optional and because flood insurance for most homeowners is also optional, the take-up rate for the combined product is likely to be even lower than for flood insurance alone. As a general rule, homeowners tend to pass on optional coverages,” Dr. Hartwig added.

Only about 12 percent of Californians, for example, have purchased optional earthquake insurance coverage in that state through the California Earthquake Authority (CEA), Dr. Hartwig noted. He also said that the ability of the NFIP to offer windstorm coverage at actuarially sound rates could be undermined by political decisions by many state-run insurers to continue subsidized windstorm coverage, thereby pricing federal coverage out of the market.

The full text of Dr. Hartwig’s remarks is available online at: http://www.iii.org/media/met/hr920/. 

The I.I.I. is a nonprofit, communications organization supported by the insurance industry. 

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