Swiss Re’s Smith: NFIP is “unsustainable”

Swiss Re’s Smith: NFIP is “unsustainable”

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The National Flood Insurance Program (NFIP) is not fundamentally sound and is unlikely to continue in its present form, says Swiss Re’s Americas CEO Eric Smith.

 Smith was speaking at a media briefing given by Swiss Re, The Climate Group and the American Security Project announcing the 5th anniversary of New York Climate Week held at Nasdaq.

Smith said that the programme was not originally designed to be a typical insurance programme and had strayed from its original purpose.

He says: “The programme in the way it exists today is not fundamentally sound; it was never intended to be. I don’t mean to be critical of the NFIP. When the folks envisioned it years ago it was really a mechanism to pre collect some of the payments they knew they would be making in the years ahead. It was never intended to be a true insurance programme.”

There has been a call by many in the industry for the private sector to take on more flood insurance and alleviate some of the burden from the federal government.

In his speech during the media briefing, Smith acknowledged that private investment could take a significant amount of flood burden off tax payers.

“The programme is operating with a $24bn debt, with the billions of dollars paid in Sandy claims only adding to that growing deficit.  Clearly, the current set-up is unsustainable.

“However, we believe there is an opportunity to shift a larger share of flood risk away from the taxpayer to the private sector.”  

When discussing whether the industry would have the capacity available to take on some of that flood risk, Smith was optimistic. He felt that if the programme could be underlined by strong actuarial principals then it was a risk that the private market could certainly insure.

He added: “When you’ve got something that is predictable and can last over many years then you’ll have tremendous capacity in the market but the preface is the fundamentals have to change.”

Speaking to Reactions after the press briefing Smith confirmed his feelings that the programme in its current form is unsustainable.

Commenting on the NFIP as a political programme he said: “As the climate gets worse and there’s more of these I think it’s going to reach a breaking point. This time in the tri-state area we asked DC for $70bn and got it but what if it had been a much worse storm and we asked for $380bn. Some of the rest of the country didn’t like it but $70bn was tolerable. However, if we’re not careful we are going to end up with a massive claim that just doesn’t fit. That’s why we need to plan now, we need to get it out into the open and we need to make it a sound programme.”

Congressional activity suggests that the federal government is indeed attempting to move the programme towards actuarial standards. Smith believes is a highly positive development.

He said: “In 2012, the US Congress passed the Biggert-Waters Act, which represents the most substantive reform to the NFIP programme in quite some time.  

“The crux of the reform bill was the mandate that the NFIP begin to move its rates, which are currently subsidized, to actuarially sound prices.  We believe that this fundamental change will help homeowners understand the true risk that natural catastrophes pose to their homes and possessions.  

“But, we also understand that many in Congress are now concerned that as the rates begin to increase, consumers will face an affordability issue.  We hope that Congress can find a way to address this issue while still moving forward on the crucial reforms in Biggert-Waters.” 

This privatisation of flood insurance is gaining some traction in Congress.

On January 4 Chairman Jeb Hensarling of the Financial Services Committee stood on the floor of the House and commented that Hurricane Sandy had reminded the US of the inadequacies of the NFIP, and that the programme was unsustainable and presented the very real problem of the US government not being able to pay claims to flood victims he proposed a solution to end the programme.

He said: “As many in this body know, I have long been critical of the National Flood Insurance Program.  For more than four decades this experiment in government-provided flood insurance has proven to be ineffective, inefficient and indisputably costly to hardworking American taxpayers. 

“Last Congress we passed a re-authorization bill with modest reforms to begin eliminating outdated subsidies and get the program on a path towards actuarial soundness, but Sandy has hit before many of these provisions could take effect. 

“As Chairman of the Financial Services Committee, I wish to inform all members in this Congress, our committee will take up legislation to transition to a private, innovative, competitive, sustainable flood insurance market; one that serves the needs of all of our countrymen, but ends the unsustainable taxpayer bailouts once and for all.  A great physical tragedy of today should never become an even greater fiscal tragedy for our children tomorrow.” 

The R Street Institute for free markets welcomed Chairman Hensarling’s commitment. R Street senior fellow RJ Lehmann noted that while there will be challenges in moving to a fully private market for flood insurance, including development of appropriate underwriting and catastrophe modeling tools, flood risks already are privately insured in many other developed markets, including Australia and the UK.

“For decades, the NFIP has been offering below-market rates that have subsidized construction in risky and environmentally sensitive regions across the country. Unwinding those distorted market signals in a way that causes minimal pain to existing home and business owners will be a challenging process, but one that is well worth exploring for the sake of both taxpayers and the environment,” Lehmann said.

Although these comments took place in January it demonstrates that discussions are taking place to privatise the NFIP.

Smith of Swiss Re stated at the briefing that a fully private solution would not be unusual. Speaking about flood insurance being handled by the private sector he commented: “In many parts of the globe that’s how it’s run, so we’re a little bit unusual here in the US that we operate in the way that we do.”

One further thing that Smith was sure of, however, was the need for the insurance industry to remain a partner to the government.

He commented: “There are certain challenges to society where it just makes sense to partner up . Whether its terrorism, whether its flood or whether its climate change, there are so many different parties to this.
“In California earthquakes are a big issue, and the California Earthquake Association is a good example of public private partnership. In Texas there’s a windstorm partnership and Alabama there is also one so they’re all over. Whether it’s minor subsidence or earthquakes or floods there’s lots of opportunities and for the most part it works quite well.

“It also works globally, at Swiss Re we have gone into Mexico and have worked with the Mexican government directly and come up with a very innovative way for them to plan for and to adapt to the climate.

“So we’ve created coverage for the federal government where if an earthquake or a hurricane hits and there’s huge damage, then we can step in and write the huge check like we do and it allows the government to immediately start to rebuild infrastructure, put people back in their homes and provide essential services.

“The idea is society is going to be disrupted and you want the suffering to be as minimal as possible and one of the ways you can do that is to let the government know that they have the resources available immediately to rebuild that basic infrastructure. The rest of it can occur over time but you have to get society back on their feet.”

By Sam Kerr

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