Private Flood Insurance Proposals Could Lead To Lower Prices – Except On The Coast

Roughly 400,000 of Louisiana's flood insurance policyholders could see cheaper prices and better coverage if Congress makes it easier later this year for insurers to sell private flood coverage, industry experts say.

Such a move also could mean skyrocketing rates for 100,000 other policyholders in coastal areas of the state left behind in the National Flood Insurance Program, unless Congress takes steps to provide relief. Suggested fixes include providing those policyholders with subsidies, making private insurers share the risk or mandating that every federally-backed mortgage has flood protection, even on homes outside risk zones. The last two suggestions would spread the risk to make the insurance affordable, proponents say.

"If a private market emerges, I anticipate that 400,000 of those 500,000 (policyholders in Louisiana) will get better coverage at cheaper rates than offered by the National Flood Insurance Program," Insurance Commissioner Jim Donelon said. "The other 100,000, mostly in coastal areas, will not."

Congress will take up reauthorizing the financially strapped National Flood Insurance Program later this year.

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Louisiana traditionally is a major beneficiary of the program, which expires Sept. 30. In 2016, the NFIP had 59,932 claims and made $3.7 billion in payments. Louisiana, with the catastrophic August flood and another one last March, accounted for close to half of those claims and $2.4 billion in payments.

Congress has been wrestling with reforming the NFIP for years. The program is $25 billion in debt, with $17 billion of that from hurricanes Katrina and Rita in 2005.

Donelon and others are confident the renewal legislation will include a fix enabling banks to accept private flood insurance as an alternative to NFIP policies for federally backed mortgages. Lenders require homebuyers in high-risk zones to buy flood insurance, and nearly all of that coverage now comes from the NFIP.

An influx of private insurers would allow the federal program to shed the risk on properties in low-risk areas, properties that typically account for 25 percent of the program's annual losses, Donelon said.

Having low-risk properties in the program help spread the risk and lower the overall cost of flood insurance, so removing the less-risky policies may trigger higher rates in Louisiana's coastal parishes.

"But from my perspective, and most if not all of my colleagues', the benefit that the great majority would receive … outweighs the risk to our more vulnerable folks in coastal, low-lying parts of our state," Donelon said. "It is a tricky path to navigate, but I think we can manage it."

The NFIP renewal would have to include a provision to provide coverage at affordable rates for the 100,000 coastal policyholders, Donelon said. He believes Congress is willing to subsidize those policies.

U.S. Rep. Garret Graves, R-Baton Rouge, likes the idea of private insurers increasing competition and lowering the cost of flood insurance. But private insurers' entry should be managed, he said.

"If you just flat out allow private insurers to come in and cherry pick the market, you're going to have the high-risk pool largely comprised of folks in south Louisiana," Graves said.

One way to avoid that is requiring private insurers to take on a certain percentage of higher-risk properties. Another possibility is to let private insurers come in with no conditions, but require the federal government to subsidize premiums in the areas where federal government activities have increased the likelihood of flooding.

Some may argue that residents of high-risk areas should pay more for flood insurance, Graves said. The problem with that argument is that the federal government is responsible for that vulnerability.

The U.S. Army Corps of Engineers and the mismanagement of the Mississippi River system largely created the coastal erosion that's made south Louisiana so vulnerable to flooding, he said. Those same federal actions are also the reason so many Louisiana property owners pay disproportionately high rates for coverage.

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"This whole issue of the federal government making us more flood-prone and then trying to make us pay for it is bogus," Graves said.

Property owners should pay for coverage, but they should only bear the costs for the risk they caused, he said. There is growing support for this idea.

Others are less concerned about the impact of private flood insurance on the NFIP. Joe Pigg, senior vice president of mortgage financing at the American Bankers Association, said the industry group doesn't believe private insurers will take over the flood business.

"We think the NFIP will be the default (coverage) as it has been, but private policies will be available to drive competition and lead to better prices," Pigg said.

The bankers want the NFIP to remain in place, he said. However, the group is hoping reauthorization will address some of the program's challenges, including implementing rates that cover costs while remaining affordable.

Five years ago, when the flood insurance program came up for renewal, Congress enacted reforms to make flood insurance premiums cover costs. Enormous rate increases resulted. Louisiana homeowners reported premiums 10, 20 and even 50 times higher. Property owners howled, and in 2014 Congress reversed course to limit rate increases.

But many, Donelon among them, expect Congress will again push the NFIP to become self-sufficient.

Making that happen while keeping flood insurance affordable will be difficult at best.

Donelon believes he has the solution, one he has suggested for at least a decade: require flood and earthquake coverage for every federally backed mortgage, not just those in high-risk zones.

Only about 14 percent of U.S. homeowners currently buy flood insurance. Compare that to the United Kingdom, where 95 percent of homeowners do. The National Association of Insurance Commissioners says that's because flood insurance is bundled with homeowner's coverage. UK consumers aren't given the choice of buying flood insurance separately.

Another reason for the low U.S. participation is that flood insurance isn't required for homebuyers in low-risk areas, Donelon said. That sends a strong message to the property owner that flood coverage is a waste of money.

Mandating flood and earthquake coverage would spread the risk across enough households to sharply reduce the cost per policy, he said. Unfortunately, the idea has failed to gain traction, as quake-prone California and its voters oppose the idea.

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Some form of mandatory flood coverage is one of the more common suggestions for the NFIP. Mandatory coverage was one of two dozen recommendations the National Association of Insurance Commissioners suggested lawmakers consider in a 128-page study, Flood Risk and Insurance, released earlier this month.

The Coalition for Sustainable Flood Insurance, a group led by Greater New Orleans Inc. CEO Michael Hecht, has offered a similar number of proposals, including considering mandatory flood insurance for properties that have flooded in the past and received federal assistance for repairs.

The coalition also recommends increasing Hazard Mitigation Grant Program funding, which helps communities pay for projects to prevent future floods.

Graves, who is working with the coalition, said the current NFIP contains some "amazing flaws." One of the biggest is that flood and hurricane protection and coastal restoration projects aren't focused on the areas where the NFIP's greatest liabilities lie.

There's about $10 billion a year available through a variety of programs for that work, Graves said.

Graves said he is optimistic that he can explain the proposals and why they make good policy, but it's going to be challenging to get enough support to include them in the NFIP renewal.