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Reinsurers, FEMA Discuss Privatization of Part or All of Flood Program

Source: National Underwriter, Business Insurance

Posted on 06 Dec 2010

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At a forum sponsored by the Federal Emergency Management Agency (FEMA), the agency that manages the National Flood Insurance Program (NFIP), representatives of foreign and domestic insurance and reinsurance trade groups suggested that one means of reforming the battled program is privatizing all or part of it.

The Reinsurance Association of America (RAA) and the Association of Bermuda Insurers and Reinsurers (ABIR) made these comments Thursday at the forum designed to  undertake a critical review of NFIP.

A FEMA official said that with Congress considering significant reforms to the program, “FEMA is prepared to assist decision-makers by providing a comprehensive analysis that will both address issues of immediate concern and establish a solid foundation for the NFIP’s future.”

But Blaine Rethmeier, a spokesman for the American Insurance Association, cautioned that “privatization is only one of a number of concepts that needs to be evaluated.” He added that debating and reforming the NFIP is an ongoing process that began a year ago and still has a ways to go.

In his comments at the forum, Frank Nutter, president of the RAA, said that on a number of levels, there is a strong case to be made for privatizing the NFIP. He said private insurers, reinsurers and capital markets have the capacity and interest in underwriting flood insurance risk, and that has a “real upside for the American taxpayers who ultimately bear the costs of the current program.”

A guiding principle of the NFIP “should be to protect the American taxpayer,” Mr. Nutter added.

Brad Kading, president and executive director of ABIR, also noted that private insurance and reinsurance sends important signals to consumers about risk since prices are based on the risk transferred.

“Thus, incentives are created to preserve environmentally sensitive land from development; to promote storm proofing and risk mitigation by property owners; and to protect coastal wetlands as important hurricane damage buffers that further keep people and their property safe,” he said.

Mr. Nutter and Mr. Kading suggested a number of options that could be considered for privatizing all or part of the NFIP.

They included having the private insurance and reinsurance sector assume flood risk over time and eliminating or greatly reducing the federal role for providing insurance if insurers could be encouraged to underwrite flood policies as part of standard homeowners policies with actuarially sound, risk-based rates that reflect the true cost of capital.

They also said insurers should be provided with incentives to assume NFIP policies and that private sector flood coverage should be exempt from state rate regulation, or alternatively, federal law should authorize competitive use and file rating rules for federally determined flood risk coverage.

Other ideas they proposed included forming a consortium of private sector underwriters supported by private reinsurance and utilizing the NFIP as an aggregator of risk—at risk-based rates—with a defined strategy to spread the risk to the private reinsurance and capital markets.