The Risks of Hazard

President Trump signed a hurricane relief bill that includes $16 billion in debt relief for the embattled National Flood Insurance Program. The flood program has a Congress mandated debt ceiling of $30.4 billion, which it reached during Harvey, Irma, and Maria (HIM). This action will allow U.S. Treasury funding of the program.

Is help on the way?

Well, kind of. Premiums are on the rise as the search for actuarial solvency continues for the NFIP. You can read the entire Insurance Journal article from April 5th titled Federal Flood Insurance Average Premium to Rise 8% but here is how it ends: ‘However the premium hikes are likely insufficient to keep the program from sinking into debt, according to a recent government report.’

What is being done currently –

Flood poses risk to property and productivity on every continent, and most developed countries have flood insurance available to mitigate that risk. However, everywhere you go, the flood insurance market is different.

There are four principle types of flood insurance models around the world, differentiated by who backs the insurance (government or private markets), and whether it’s bundled or separate from other property insurance coverage (e.g., flood and fire insurance are frequently bundled together).

Each style has its own pros and cons, and each exists in its region for a variety of reasons. Here is a quick look at the four types.

A tumultuous U.S. Nat Cat 2017 year bookended by huge first quarter losses from hail and tornado and an estimated $50bn+ insured losses from HIM (Harvey, Irma, and Maria) still did not impede the private flood insurance market from growing by 51.2% according to information referenced in an Insurance Journal article published on March 18th of this year. That news comes despite Congress’ delay in reform and reauthorization of the NFIP, currently +-$25 billion in debt (pre HIM).

Cap Radio ran a series of stories in March how the state of California is thinking of pulling out of the NFIP. Not only that – they are thinking about forming their own version of the NFIP for the state. Let’s take a look at this imaginative plan to replace a system that doesn’t work very well with a plan that’s…kinda the same.

The thinking is pretty clear for leaving the NFIP – California has paid more in premiums than they’ve received in claims. In other words, they’re the comparative low risk in the risk pool and they are paying the same rates as everyone else in the country. This makes sense in the same way that there are lower risk properties in A zones to offset higher risk properties – the program needs to balance high risk with lower risk. In yet other words, they are cherry picking the NFIP at the state level. Epic cherry-picking!

Last week, a new Senate bill was introduced (by a bipartisan tandem of senators) to reauthorize the NFIP for 10 years, along with a study on flood insurance from the General Accounting Office (GAO). Both documents propose expansion of private flood insurance in the US. When added to the NAIC/CIPR’s flood study  and the “monograph”  (love that term) from the American Academy of Actuaries, the momentum in regulatory circles is clear. We just need something from The Big I to add to the choir.

The Senate bill, as mentioned, is intended to reauthorize the NFIP for another decade, but with significant changes. It does its best to juggle the various mandates the NFIP fulfills (flood plain management, flood risk mitigation, lender support, economic growth, along with flood insurance), and thus presents a bucket list of ambitions. As usual, the imperative on the NFIP to serve so many purposes will ultimately jeopardize its ability to be an effective insurer. However, as long as everyone is OK with this state of affairs and doesn’t expect the NFIP to actually be a solvent insurer of flood risk… whatever. Here is a link to Insurance Journal for a summarized version of the bucket list.

On the same day, the GAO released a study on flood insurance that complements the other studies coming out in April. It is a hefty affair, as one would expect from that august body of bureaucracy, but it is very, very good reading. The thing I like most about reading the GAO study is that it is the latest in a tradition of studies on flood insurance – they refer to their previous reports from decades past, often citing conclusions that have proven to be valid. The other studies are firmly focused on the present and future, while the GAO discusses the future from a durable and decades-long foundation of studies. And what do they say from this position? The same thing as everyone else: there needs to be more private flood insurance. Well, that’s one of their six conclusions, at least: