Private insurers forced out of flood insurance market

Can the government’s program step in?

Storms hit the U.S. coastal areas every year, leaving a path of devastation and damaging floods in their wake.

The number of private insurers writing policies in the coastal insurance market continues to shrink due to these increasingly unmanageable risks. As a result, many impacted homeowners rely upon the National Flood Insurance Program (NFIP), which was created by Congress in 1968, according to a recent report by the Union of Concerned Scientists.

Although the NFIP provided more than 5.6 million insurance policies, with $1.25 trillion in insured assets in 2012, multiple factors are challenging the survival of the program.

As of November 2012, NFIP was more than $20 billion in debt, which is expected to grow to $30 billion once all Hurricane Sandy claims are settled by homeowners.

Additionally, the flood-risk maps created by the Federal Emergency Management Agency to help determine insurance rates are failing to account for future sea level rises and long-term erosion, the Union report concluded.

Insurance claims on properties repeatedly damaged by flooding have accounted for roughly a quarter of all NFIP payments since 1978. Currently, repetitive-loss properties represent 1.3% of NFIP policies, which are expected to account for 15% to 20% of future losses, the coalition explained.

"NFIP does not increase rates on properties that have had repeated claims, although such rate increases are a common practice in other private insurance markets," the report noted.

Furthermore, NFIP’s ‘grandfathering’ clause exempts certain properties from complying with protective requirements and allows them to avoid paying higher insurance rates even if the location is rezoned with a higher flood risk.

Last year, the Biggert-Waters Flood Insurance Reform Act was put into place to initiate steps to remedy some of the shortcomings in the NFIP.

Roughly a fifth of all proprietors were paying subsidized rates that were in the grandfathered clause of the NFIP. As a result, they’ll see their rates go up over the next four years until they reach the appropriate acturiarial levels, explained R Street Institute senior fellow Ray Lehmann.

"The act allows the program to build reserves so they won’t have to go back to taxpayers to cover the losses," Lehmann said.

He added, "[The act] doesn’t fix the problem, but it does help the problem from getting worse in the future. We should work toward bringing more of this coverage into the private market as soon as possible and put forth new policy initiatives."

To address these concerns, the Union of Concerned Scientists recommends that insurance rates accurately reflect risks.

“Some increases in NFIP's insurance rates are already set to take place; these increases should not be delayed,” the report urged.

Additionally, FEMA should use the latest scientific projects of sea level rises and storm surge in maps to determine future flood risks and insurance rates.

FEMA should also discourage continued building and rebuilding in high-risk areas by reducing payouts for repetitive losses and increasing rates of repeated losses, the scientists noted.

NFIP is also encouraged to remove its grandfather provisions that subsidize property owners at the expense of others and implement risk development in coastal floodplains.

Going forward, the biggest action Congress can take is the implementation of additional reforms, the Union of Concerned Scientists pointed out.

"Mandatory flood insurance should be enforced for all properties in high-risk areas, options for home buyouts and relocation should be made available in the highest risk areas, and incentives should encourage property owners to make upgrades that help reduce the risk of coastal flooding damage," the report suggested.

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