US flood cover in doubt after rate hike delay

US flood cover in doubt after rate hike delay

The future of the National Flood Insurance Programme (NFIP) has been called into question after the US Senate voted to delay a move to market rates for home flood insurance premiums following responses from US home owners in flood zones.

The delays are now being debated in the US House of Representatives and if passed they will negate The Biggert-Waters act passed in 2011 that sought to make rates more market appropriate in order to alleviate the heavily indebted NFIP.

“The Senate and the House created legislation and signed into law the reform act just over 18 months ago, so the problem here is that there is a threat of trying to roll back its implementation, despite the fact that it had been approved by an overwhelming bi-partisan margin only a year and a half ago,” Bob Hartwig, president of the Insurance Information Institute (III), told Reactions.

“As the rate increases began to be implemented in 2013 there were some in Congress who began to have misgivings.

“The Senate is Democrat controlled and the House is Republican controlled, and the House seems less receptive to the idea of basically nullifying the Biggert-Waters 2012 act and the administration itself has said that it does not support effectively rolling back the Biggert Waters act either.”

Hartwig is concerned that because of the nature of passing legislation in Washington, the Senate’s proposed delays to the Biggert-Waters act could go through as part of a larger bill even if no such delay would be likely to happen as the result of a simple up or down vote.

The Senate’s decision to implement rate delays on the NFIP was met with opposition from the Obama administration which expressed concern at delaying potentially vital reforms that would be necessary if the flood programme is to stay viable.

“I think the White House is very aware of the solvency issue and the fact that the NFIP is approximately $25bn in debt,"says Carolyn Coda, regulatory officer at Swiss Re. “The NFIP has about $5bn left in borrowing authority, but that would not be enough to cover another big event like Hurricane Sandy or a Hurricane Katrina.

“This means that in the event of another large scale natural catastrophe, the NFIP would have to go back to Congress to ask for more borrowing authority.

“The last time the NFIP had to secure additional borrowing authority from Congress was after Hurricane Sandy and it was wrapped up in the larger Sandy appropriations bill.

“As you will recall, the appropriations bill was met with some political resistance, which I think shows how difficult the situation around the NFIP has become.”

2014 is a mid-term election year where a third of the Senate and the Entire House of Representatives will be up for election.

With so many of their constituents against the rate hikes there may be some level of political opportunism taking place with regards to delays, with incumbents looking for a way to fend off potential challengers come November.

“There’s no question that election year politics play into this and certain individuals are in tight races and that they are looking to appeal to their constituencies,” says Hartwig.

“So even though politically some may see themselves to be fiscal conservatives, if at the end the Biggert-Waters act must be sacrificed for them to be elected, then there are some that are willing for it to be sacrificed for political expediency.”

Coda feels the delays are not just politically motivated and that there are wider constituency-based issues behind those in Congress who are seeking delays.

“Support for the delay is so much broader than just those in Congress who represent districts that are in contention right now,” says Coda. “You saw recently that Louisiana governor Bobby Jindal sent a letter to the House arguing for the delays.

“So I think that what has happened is that as lawmakers have heard more and more from their constituents they have started to realise it’s not just a state issue, it’s not just a North East issue and it’s not just a political issue.”

Like many hotly contested political issues there now seems to be an attempt to find some consensus between those parties arguing the solvency position and those who are seeking to keep flood rates low for their constituents.

“The debate in Congress is about trying to find the middle ground,” says Coda. “I think there are some people who prioritise the solvency issue and are taking a little bit more of a long view as opposed to the immediate legitimate concern of constituents calling and saying that they are being told by FEMA that their bills are going to go up and that they need help on this.”

Coda says there is serious concern, particularly among conservative members of Congress, about supporting a programme that is currently so indebted.

The indebted nature of the programme has meant that in the wake of Sandy, funds that had been previously earmarked to pay for previous storms had to be diverted to pay for rebuilding communities post-Sandy.

“This is what happens when you have a programme that is so indebted but on the flipside can’t charge risk-based rates,” says Coda.

Coda argues that while rates remain so low it is extremely difficult for the private market to enter as it is not able to compete with the government rates.

Unlike the NFIP, private insurers cannot offer discounted flood rates and therefore would not be able to gain any real traction in a competitive market.

However the quandary remains that if the NFIP does not move to a market-based rate pricing model, then the programme will face considerable opposition to its potential re-authorisation in three years time.

“I think a lot of us are also thinking about what is going to happen in a few years when it is once again time to reauthorise the NFIP,” says Coda. “I think that if some of the rate increases are not preserved, and in the unfortunate circumstance we experience another large nat cat event, it is going to be very difficult politically to secure reauthorisation.

“So the hope would be that whatever the final bill is takes that into consideration and does some of the hard work now so that we are not faced with a very difficult situation three years from now.”

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