When Congress turns its attention to flood insurance in 2011, wind will be off the table and privatization may find its way on it.
The Democrat-held Senate and newly Republican House of Representatives are unlikely to take up the fate of the National Flood Insurance Program straight out of the gate in January, but they will not be able to push the matter down the road for the duration of the session. A one-year extension of the existing program is scheduled to lapse Sept. 30, 2011. Efforts to reauthorize and reform the program failed to pass this year. Short-term stopgap extensions kept the program running on and off in the summer and fall until members agreed to the one-year pause.
Soon after the 112th Congress debuts, the Federal Emergency Management Agency will meet with private insurers to gauge their interest in privatizing the program. FEMA plans to invite the chief executive officers of 10 companies participating in the long-standing "write your own" program -- in which insurers write and service the standard Flood Insurance Policy under their own names -- to a round-table discussion "of the actions needed for the private insurers to seriously consider bearing the risk for some or all of the flood peril," according to a letter from Edward Connor, acting assistant commissioner for mitigation. No decisions will be made at the Jan. 26 meeting, he said.
Privatization is one option on the table, but has not been formally endorsed by FEMA. The NFIP operates under terms set by Congress and "the power to make any legal changes to the program rests with lawmakers," FEMA spokeswoman Rachel Racusen said.
Industry representatives are skeptical that privatization could work. Congress would have to accept politically difficult terms to counter the federal government's built-in advantages, including no need for reinsurance no tax payments, said Ben McKay, senior vice president of federal government relations for the Property Casualty Insurers Association of America.
"You could do it, but you'd have to get double the premium," he said.
The NFIP insures homes and businesses in nearly 20,000 communities that adopt and enforce flood-plain management laws. A private insurer could be allowed to write off certain regions where insurance is unprofitable, said Robert Detlefsen, vice president of public policy for the National Association of Mutual Insurance Companies. A core policy question is whether it should be treated as regulated insurance or as a social welfare program that could be means-tested, he said.
"There's a school of thought that that's how we should think of it," Detlefsen said.
The NFIP is more than $18 billion in debt, largely due to the extreme damages of Hurricane Katrina.
A Senate bill under consideration during the lame-duck session would provide a five-year delay for the mandatory purchasing of flood insurance in communities newly included in designated flood zones, followed by a five-year phase-in period. Similar language was included in comprehensive NFIP legislation passed by the House of Representatives earlier this year, but that measure failed to gain traction in the Senate (BestWire, Dec. 6, 2010).
While politically understandable, isolating the delay from any structural changes or a long-term reauthorization is poor policy, McKay said. It would leave affected communities financially vulnerable in the event of a significant flood -- and taxpayers potentially on the hook for a relief package, he said. With the current Congress against tight deadlines on tax and spending bills and soon to expire, the bill is unlikely to pass this year, McKay said.
With Dodd-Frank in its rear-view mirror, McKay hopes the Senate Banking Committee can get to work on the NFIP well before the Sept. 30 deadline so
it can avoid the short-term disruptions that plagued the program and would-be policyholders in 2010. "We didn't do a good enough job of explaining to the Hill just how disruptive that is," he said.
Some insurers are optimistic that a long-term reauthorization of the NFIP is in reach following the defeats of the leading boosters of including windstorm coverage, Reps. Gene Taylor, D-Miss. and Ron Klein, D-Fla. Taylor, who lost his home to Katrina, had repeatedly clashed with the industry.
The wind issue complicated the reauthorization arguments of the industry, which faced the task of urging many lawmakers unfamiliar with the issue to reject wind bills and amendments, but approve the straight flood bills. "It was a huge distraction and it was confusing," McKay said.
Congress will be debating the flood program at least up until Sept. 30, said former Washington, D.C. Insurance Commissioner Lawrence H. Mirel, a partner with Wiley Rein LLP in Washington, D.C., with expertise in catastrophe issues. "No one can figure out what to do," he said. "We're going to be right where we were after Katrina."