Under Water: The U.S. National Flood Insurance Program Reauthorisation

Read­ing time: 3 mins

The U.S. Nation­al Flood Insur­ance Pro­gram is due to expire this year. As Con­gress cur­rent­ly car­ries out the reau­tho­ri­sa­tion process, Rade Musulin,Vice Pres­i­dent of Casu­al­ty of the Amer­i­can Acad­e­my of Actu­ar­ies and CEO of FBAl­liance Insur­ance, tells us about the pro­gram and dis­cuss­es reforms Con­gress is con­sid­er­ing for the future.

The mech­a­nism for pro­vid­ing flood cov­er­age is very dif­fer­ent in the Unit­ed States than Aus­tralia. While Aus­tralians have gen­er­al­ly been able to secure cov­er­age for many types of flood from pri­vate insur­ers with­out sig­nif­i­cant gov­ern­ment involve­ment, in the US most flood cov­er­age for home­own­ers and small busi­ness­es is pro­vid­ed by the Nation­al Flood Insur­ance Pro­gram (NFIP), a gov­ern­ment pro­gram direct­ed by the Fed­er­al Insur­ance and Mit­i­ga­tion Admin­is­tra­tion of FEMA, which is part of the U.S. Depart­ment of Home­land Secu­ri­ty. The law autho­riz­ing the NFIP is set to expire on Sep­tem­ber 30, 2017, so Con­gress is in the midst of what promis­es to be a con­tentious reau­tho­ri­sa­tion process.

In recent decades, the NFIP has incurred almost A$32 bil­lion of debt to the US Trea­sury, large­ly due to huge loss­es from Hur­ri­cane Kat­ri­na and Super­storm Sandy. It bor­rowed an addi­tion­al A$1.8 bil­lion in 2016, large­ly to cov­er loss­es from a trop­i­cal rain sys­tem affect­ing Louisiana and Hur­ri­cane Matthew. This has prompt­ed calls from fis­cal con­ser­v­a­tives in Con­gress to reform the pro­gram, as it is unlike­ly to be able to repay its debt as it is cur­rent­ly struc­tured.

The NFIP insures over 5 mil­lion poli­cies gen­er­at­ing about A$4.5 bil­lion in annu­al pre­mi­um. It was formed in 1968 to address sig­nif­i­cant prob­lems with avail­abil­i­ty and afford­abil­i­ty of flood cov­er­age from pri­vate insur­ers. In the US almost all pri­vate insur­ance poli­cies in home­own­ers exclude cov­er­age for ris­ing water of any type, in con­trast to Aus­tralia where most poli­cies pro­vide at least some cov­er­age. US con­sumers want­i­ng flood cov­er­age gen­er­al­ly must buy a sep­a­rate pol­i­cy from the NFIP, which has des­ig­nat­ed “high risk” zones where mort­gage lenders gen­er­al­ly require a flood pol­i­cy to be pur­chased. Over­all, only about 10% of home­own­ers buy poli­cies (much high­er in the high risk zones), leav­ing many with­out cov­er­age when flood­ing occurs.

Sig­nif­i­cant­ly, NFIP dwelling cov­er­age is lim­it­ed to about A$325,000 on a replace­ment cost basis, con­tents cov­er­age is lim­it­ed to about A$130,000 on an actu­al cash val­ue basis, and coastal storm surge is cov­ered. In Aus­tralia cov­er­age is usu­al­ly for the replace­ment val­ue of the dwelling, replace­ment cost con­tents is avail­able, but costal storm surge is not cov­ered. It is argued that the exis­tence of gov­ern­ment flood cov­er­age for beach­front prop­er­ty in the US has encour­aged overde­vel­op­ment in high risk areas. Large loss­es from trop­i­cal cyclones have dri­ven the NFIP’s debt, and if pre­dic­tions of ris­ing sea lev­els mate­ri­al­ize in com­ing decades the program’s finan­cial expo­sure could be enor­mous.

Con­gress is con­sid­er­ing many reforms, includ­ing increas­ing pre­mi­ums, encour­ag­ing the use of rein­sur­ance, and push­ing pri­va­ti­za­tion. Var­i­ous stake­hold­ers, includ­ing local com­mu­ni­ties, con­sumer groups, real­tors, and builders are resist­ing changes that may impede devel­op­ment or hurt prop­er­ty prices.

There are sev­er­al actu­ar­i­al aspects of the reau­tho­riza­tion debate, which has prompt­ed the Amer­i­can Acad­e­my of Actu­ar­ies to pro­duce a mono­graph on the NFIP that will be released short­ly. The mono­graph offers a com­pre­hen­sive look at issues sur­round­ing the pro­gram, includ­ing its his­to­ry, how it inter­acts with oth­er gov­ern­ment func­tions (like the devel­op­ment of build­ing codes), how it is fund­ed, its sources of cap­i­tal for extreme events, recent devel­op­ments in flood mod­el­ing, how ris­ing sea lev­els may affect the pro­gram, how actu­ar­i­al stan­dards and prin­ci­ples can inform ratemak­ing, and poten­tial issues with pri­va­ti­za­tion. While the Acad­e­my does not take advo­ca­cy posi­tions for or against spe­cif­ic pol­i­cy pro­pos­als, the mono­graph does offer a num­ber of obser­va­tions on var­i­ous ideas that have been advanced to mod­i­fy the pro­gram. The mono­graph will be avail­able from the Academy’s web­site, www.actuary.org, around 1 April.

Pol­i­cy mak­ers in Aus­tralia have on occa­sion con­sid­ered actions to address per­ceived mar­ket defi­cien­cies for cat­a­stroph­ic cov­er­age, such as the recent North­ern Aus­tralia Insur­ance Pre­mi­um Task­force. The US expe­ri­ence with flood insur­ance offers valu­able lessons in how pol­i­cy ini­tia­tives can affect eco­nom­ic activ­i­ty, gov­ern­ment finances, and the insur­ance sys­tem.

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About the author

Rade Musulin

Rade Musulin is Vice President – Casualty of the American Academy of Actuaries and CEO of FBAlliance Insurance. He recently led the Academy’s Working Group which produced the monograph. This article reflects his personal views and not those of the Academy or FBAlliance Insurance.

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