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FOR IMMEDIATE RELEASE
OLDWICK - NOVEMBER 07, 2017 02:27 PM (EST)
While the U.S. Senate’s recent approval of a $36.5 billion disaster relief package forgave $16 billion in debt owed by the National Flood Insurance Program (NFIP), it did not include broader changes to the program that would make it more sustainable in the long run, according to a recent report from A.M. Best.
The Best’s Special Report, titled, “Disaster Relief Package Provides Temporary Help for the National Flood Insurance Program; Will Private Insurance Be Part of a Long-Term Fix?” states that over the past 25 years, the number of NFIP policies in force has more than doubled, to almost 5.1 million as of 2016. In recent decades, demographic shifts, volatility in weather patterns and rising sea levels have exacerbated the flood problem. The catastrophic damage wrought by Hurricanes Harvey, Irma and Maria makes the issue of addressing the NFIP’s failings—as well as expanding the market to more realistically include private flood insurance solutions—more critical.
A.M. Best believes that the NFIP remains essential and has a purpose, but is at a crossroads with regard to whether privatization is a viable option. Although some insurers have already entered this space, A.M. Best believes they have done so on a very limited basis, where pricing and coverage options are most suitable.
In 2016, only 21 property/casualty (P/C) insurers were providing private flood coverage, with only three writing more than $50.0 million in direct premiums written. Sixty-two P/C insurers wrote federal flood coverage through the NFIP for almost $2.9 billion, compared with the approximately $415.0 million in private flood coverage written.
Privatizing federal programs is a theme voiced by President Trump, and the NFIP could become a target, given the fast-approaching deadline for a decision on its reauthorization. However, given the lack of broader changes to the program, which would make it more sustainable; it is viewed by those who opposed it as nothing more than another taxpayer bailout of a failing government program.
A.M. Best believes that, for privatization to be successful, true risk-based premiums need to be achieved. Reinsurers need to participate as well, as in the NFIP’s success in securing $1 billion of reinsurance cover. This is a small step, but in terms of dollars, it is a big step for the program in getting reinsurers to accept this risk. Reinsurers are expected to pay out full loss limits for claims from Hurricanes Harvey and Irma. Unfortunately, losses from these events will likely result in higher reinsurance costs when the program is renewed in January, 2018. Nevertheless, reinsurers will play a critical role in whether private insurers move into this space in any meaningful way.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=267604 .
A.M. Best is the world’s oldest and most authoritative insurance rating and information source.