NAMIC: Private Flood Insurance Can’t Exist Without Risk-Based Rates For NFIP

The National Flood Insurance Program is needed to ensure that homeowners facing significant risk of flooding can find affordable coverage, but the program needs significant reforms if Congress hopes to foster a private market for flood insurance, the National Association of Mutual Insurance Companies said today.

In testimony submitted to the House Financial Services Subcommittee on Housing and Insurance, NAMIC outlined the challenges facing the program, which was created in 1968 and provides insurance for millions of homeowners, but also is currently more than $20 billion in debt to the Treasury. The focus of the hearing was how to encourage the underwriting of more flood risk in the private sector and legislation that would specifically state that private flood insurance would satisfy lender coverage requirements to the same extent NFIP policies do.

“At the heart of this issue is the fact that the NFIP does not charge rates that match the risk a property faces from flooding,” said Jimi Grande, senior vice president of federal and political affairs for NAMIC. “As long as that continues to be the case, the program will continue to go deeper and deeper in debt to the taxpayers, and the marketplace for private-sector flood insurance will continue to struggle to develop. Private insurance companies can’t borrow billions from the Treasury, and they can’t compete with a government program that charges significantly less than the private sector would need to in order to offer policies.”

The nature of the program’s premiums, in which subsidies were masked as simply low rates, has exacerbated the problem, Grande said. Price signals lead property owners to believe that their risk of flooding is less than is the case, and the low cost of federal flood coverage encouraged development in high-risk areas and environmentally delicate wetlands. Congress sought to fix the program through the Biggert-Waters Act of 2012 but repealed and delayed some of those reforms a year later.

“Having been led to believe they were safe from flooding for years, the true cost of flood insurance caused a significant outcry as homeowners began to see their actual risk of flooding,” Grande said. “At that time, NAMIC proposed several solutions, including direct subsidies for cases of true need, that would have kept flood insurance affordable while strengthening the NFIP, but Congress chose to simply repeal or delay the much-needed reforms.”

In the testimony, NAMIC offered support for clarifying the lender requirement language, as well as other risk-sharing solutions such as allowing the NFIP to purchase reinsurance or issue catastrophe bonds.

“There are several ways to help the NFIP reduce its exposure to a major catastrophe,” Grande said, “but they won’t solve the significant structural issues that keep the NFIP in debt and the private sector on the sidelines.”