Bringing Private Insurers into Federal Flood Insurance Program

by Matthew Glans on June 10, 2011 · View Comments

The federal government may finally be coming around to the idea that the private insurance market must become more involved in providing flood insurance. In a new article by Maria Recio from McClatchy Newspapers, FEMA administrator Craig Fugate discussed the need for increased involvement from private insurers in providing flood insurance along our nations coasts and rivers. This is a welcome change from current policy, which has the federal government under the National Flood Insurance Program covering much of the nation’s flood risk.

“As Congress races to beat a Sept. 30th deadline to reauthorize the national flood insurance program, FEMA administrator Craig Fugate told U.S. senators Thursday that he would like the private insurance industry to participate in the debt-ridden program, now $18 billion in the red.

Testifying before the U.S. Banking, Housing and Urban Affairs Committee, Fugate said that under the program’s current federal structure “it is unlikely we can reduce the $18 billion debt.”

Fugate warned that the “high volumes” of risk from catastrophes like Hurricane Katrina saddle the federal government with the financial responsibility. “This risk should be better shared with the private sector,” he said, “rather than looking at strictly a government program.”

The FEMA chief, who administers the federal flood insurance program, said he envisioned the continuation of a federal share of the plan, especially for low income households, while making the system “more actuarially based.”

“I’m not opposed to the private sector buying the least risky policies,” Fugate said.

“We have got to have the private sector more engaged in the program.”

Other legislators agreed that private insurers should play a part in covering higher risk flood areas. Others cautioned against a delay in renewing the flood insurance program, including Sen. Roger Wicker, R-Miss and Banking Committee Chairman Tim Johnson, D-S.D. Wicker argued that delaying a reautherization of the NFIP could hurt an already stalled real estate market.

“Another program lapse is entirely avoidable, and we should not allow that to happen,” said Wicker. He made a strong push for his legislation, the Consumer Option for an Alternative System to Allocate Losses, to use increased data collected by NOAA during the claims process, which he argued is part of the solution to the wind versus water dispute problem that has rocked the Coast since Katrina.

Residents found insurers denying wind damage claims but eager to pay federal flood insurance claims from policies they administered.

Wicker, who held a roundtable with Coast residents last year on flood insurance, said, “There is no question that one of the most difficult obstacles in recovering from Hurricane Katrina – or preparing for the next storm – has been the cost and availability of insurance.”

These comments are a positive sign that the NFIP may finally be undergoing sorely needed reform to make its rates actuarially sound and competitive with private insurers.

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