UPFRONT
OPINION
GOT AN OPINION THAT COUNTS? Email iba@keymedia.com
The way forward on flood Congress’ original intent for a residual flood insurance market has been quashed, writes Craig Poulton, leaving taxpayers to carry billions of dollars of losses CONTRARY TO popular belief, the private flood insurance market has never stopped seeking the opportunity to write flood insurance. In the 1970s, the Department of Housing and Urban Development acted to unilaterally keep private insurers out of the unified flood insurance model created by Congress. The National Association of Flood Insurers actually sued to continue assuming flood risk, but during a Congressional recess in January 1978, they were shut out of America’s flood insurance arrangement by HUD, where the NFIP was then housed. No matter how well intentioned, there is no denying that this bureaucratic blunder has had massive unintended consequences, which continue to play out to this day. This action effectively nationalized America’s flood insurance industry and made American taxpayers the involuntary reinsurers of 100% of America’s flood insurance policies. Since that time, taxpayers have carried billions of dollars of flood losses, and Congress’ original intent to allow the private market to assume most, if not all, US flood risk from the NFIP over time has been quashed. It is long past time for Congress to reorient the National Flood Insurance Program and correct the structural flaws created by these ill-fated decisions made decades ago. Congress should pass legislation that designates the NFIP as an insurer of last resort and removes barriers to unencumbered operation
of the private primary flood insurance market. By doing nothing more than giving buyers the choices inherent in an unimpeded private flood insurance market, Congress can correct the mistakes of the past, reshaping the NFIP monopoly into the residual flood insurance market it was originally intended it to be. Some have asserted that broad participa-
those with lower risks should pay lower rates. Risk stratification is ultimately the only way forward, but it will take time. The slow pace of change will allow the NFIP to adapt over time to the role of insurer of last resort. The transition will be slowed down in part by the fact that only the NFIP possesses historical loss data on each structure and does not share that loss data with the private sector. This is a major impediment to rapid risk adoption by private insurers. Another reason uptake of private flood risk will be gradual is that the NFIP overprices about 50% of its policies and underprices about 50%, regardless of whether the structure is lower or higher in risk. Under this state of affairs, the private market can only effectively compete on the 50% that is overpriced. As the NFIP appropriately prices the underpriced portion of its policy base, it will take many years for the private market to win that portion. Plainly, the NFIP is not threatened in any immediate way by risk stratification; indeed, it can only benefit from it. Action from Congress that allows private insurers unrestrained access to the US flood insurance market will help the NFIP reduce its risk, shrink its losses and operate as it was orig-
“By doing nothing more than giving buyers the choices inherent in an unimpeded private flood insurance market, Congress can correct the mistakes of the past” tion by private flood insurers will result in ‘cherry-picking,’ a course of action that will leave the NFIP drowning under the weight of all the ‘bad’ flood risks. But consider this: Cherry-picking an insurer of last resort has been the mechanism that has been used to solve every similar insurance crisis for the last 100 years. Cherry-picking is the single most effective way to cure the NFIP’s structural flaws. A more formal term for cherry-picking is risk stratification. It is the backbone of the global insurance industry and the principle that makes the insurance business viable. Risk stratification is simply the concept that those with higher risks should pay higher rates, and
inally intended – as an insurer of last resort, not a nationalized industry segment. Perhaps most importantly, taxpayers will then be free from an unnecessarily heavy financial burden. With its current concentration of risk, the NFIP is not a viable solution to America’s flood insurance needs. We must break free from the old misconceptions that have brought us to this sad state of affairs and let the free market operate to the ultimate benefit of all.
Craig Poulton is CEO of Poulton Associates, which administers the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program.
www.ibamag.com
19_Opinion-SUBBED.indd 19
19
2/08/2017 3:29:08 AM