Insurers, Regulators Point To Shortcomings Of NFIP

A major lesson of Hurricane Sandy is that the National Flood Insurance Program highlights why government should not be in the insurance business, said Keith McCue, vice president of underwriting, at Renaissance Reinsurance.

Even though flood insurance was required for property owners in flood zones, penetration rates were less than 50%, he said at an insurance regulatory forum in New York City. In blue-collar communities along Raritan Bay, where mortgage-free modest homes owned by generations of the same families were destroyed, many owners had neither homeowners nor flood insurance. "Now what is the viability of those communities going forward?" McCue asked. Meanwhile, the NFIP is an estimated $28 billion in debt, while for private insurers, Sandy depressed earnings.

The storm made landfall Oct. 29 near Atlantic City shortly after it was downgraded from hurricane status. It resulted in more than a half million insurance claims in New Jersey, 70,000 of which were for flooding, according to panelist Kenneth Kobylowski, commissioner of the state Department of Banking and Insurance. He said while private insurers have settled more than 90% of claims, the federal NFIP has reported settling only half. The average homeowners claims was about $6,000, and the average flood claim was about $40,000, he said.

For private insurers to take on flood risk, rates must be risk-based, and insurers must have some control over product design, said Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers.

"We really need to look at a private-market solution," said Kobylowski. "It is clear there were not enough certified flood adjusters to handle claims, and the need for higher NFIP rates gives private insurers an opening."

About the dearth of adjusters, Steven Weisbart, senior vice president and chief economist at the Insurance Information Institute, said there hadn't been many big storms along the coast last summer and fall and that "it was not like adjusters were busy somewhere else." He said many property owners in New York also lacked insurance, that taxpayers should not subsidize rates, and that there was often political interference before Sandy when NFIP tried to reclassify certain areas as being flood-prone.

Sandy's damages also created some surprises. Weisbart observed a storm in this part of the country does not have to be hurricane force to cause a lot of damage and that although there were a lot of claims, the dollar values per claim were lower than those caused by stronger storms elsewhere. There was also a tremendous amount of wind damage inland to trees and utility poles that caused a lot of business interruption for one to two weeks, he said.

McCue said flooding caused higher-than-expected automobile damage. Kobylowski said below-ground apartment dwellers in Hudson County, N.J., were surprised to learn that they were not covered by NFIP. He also said many of the highest claims were from owners of large boats "that ended up in places boats are not ordinarily found."

On the issue of people not paying attention or simply declining to buy coverage, Kobylowski said: "If what just happened doesn't wake people up, I don't know what will. There could be no better advertisement [for insurance] than Sandy."

To its credit, the NFIP is aware of the problem, said McCue. "There's a perception in the U.S. that government will come in and bail people out, but that's not a reality." Added Weisbart: "If people are not being financially responsible, we as a society need to have a conversation about tough love."

(By Ron Panko, senior associate editor, Best's Review: Ronald.Panko@ambest.com)