6 March 2014 Insurance

NFIP wants flood risk back with insurers

A senior executive from the National Flood Insurance Program (NFIP) has said the body wants insurers and reinsurers to find ways of moving this risk back into the private sector.

Edward Connor, the deputy associate administrator of the Federal Insurance and Mitigation Administration Federal Emergency Agency (FEMA), was speaking at the SIFMA Insurance and Risk Linked Securities conference in New York this week.

He said the NFIP was only ever designed as a temporary solution, which would ultimately provide a pathway for flood risk in to be passed into the private sector. But he said a lack of interest from the insurance industry has meant that the federal government may never cease its involvement.

“The NFIP wasn’t designed to be around forever,” he said. “The idea has always been to pass this over, but so far it hasn’t happened as the private sector doesn’t want to compete with the federal government rates or take on risks that it doesn’t need to.”

NFIP, which currently faces $24 million of debt following losses from Sandy, relies on the US Treasury to provide emergency funding if it cannot pay its claims.

“We don’t want to rely on the US Treasury. While it lends us money, it’s a case of one federal organisation to another, so it must be paid back, and with interest. We need to start talking to reinsurers and private insurance companies,” he said.

NFIP has 5.6 million policyholders, $3.2 billion annually and $1.3 trillion in insured assets. Servicing 22,000 communities, New York, New Jersey and Texas are among its largest supported areas.

In order for the NFIP to move forward and create a more attractive offering for both policyholders, lenders and insurers, there must be changes, several of which Connor outlined.

He spoke of establishing a reserve fund of $150 million this year, which will increase to around $350 million in subsequent years and amending legislation which could see current subsidised policyholders face a 25 percent increase in rates with immediate effect.

“We’re also looking to collaborate with state insurance programmes in order to introduce a mediation system between policyholders and FEMA to settle disputes over whether damage was caused by wind or flood,” said Connor.

Further plans included an affordability study which will take around two years and is already underway. “If you want to increase rates you need to work out how people will pay these increased rates,” he said.

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