The US government has the residential flood risk market cornered through the National Flood Insurance Program (NFIP), but legislative moves could change the situation for the industry.
A desire to reduce the indebtedness of the Federal Emergency Management Agency (FEMA) could spur market change, Matthew Nielsen, senior director for global government and regulatory affairs at Risk Management Solutions (RMS), told Reactions, speaking at the RMS Exceedance event in Miami this week.
“FEMA wants to get some of that risk into the private market,” said Nielsen. “However, rates are heavily subsidised in high risk areas. At present there is no incentive for private insurance to get into the market.”
“The industry is helping to craft legislation to create favourable conditions for the market to evolve,” added Nielsen.
Two things need to happen, he suggested. The first is that the government needs to start risk-based pricing. The Biggert-Waters Act of 2012 was a move towards this in 2012, but was pushed back in 2014, he noted.
Effort is also needed towards upping coverage in flood zones to raise it higher than it presently is - as little as 10-20% in some high risk areas, according to Nielsen.
“This is in part because after three years of a mortgage, mortgage companies stop checking that flood insurance on a property is still in place,” he said.
In Congress, bill 2066 was passed by the House of Representatives on April 28, Nielsen noted, proposing better enforcement and mandates cover on outstanding loans.
“Most mortgage companies only accept NFIP coverage because the present wording “or equivalent” is not well defined,” suggested Nielsen.
Florida became the first US state to try to define a standard for equivalent private coverage last year.
The whole issue remains politically fraught, however.
“Politicians are trying to protect policyholders after an event, but also from a shock in insurance rates. By doing so, the NFIP continues to get further into deficit,” said Nielsen.
Attention to this issue has exploded in the past six months among legislators, regulators and insurers, he thinks.
Insurers are waiting on two things, he suggested: the legislation and the right tools to use.
He noted that RMS is working on its models, and will introduce flood severity risk maps in Summer 2016.
“The NFIP needs to move towards being the insurer of last resort, towards something like the role played by Citizens in Florida,” said Nielsen.