The Risks of Hazard

Earlier this month the New York Times published an op-ed piece discussing the new FIRMs in New Orleans. Now, if ever there were going to be contentious flood maps published by FEMA, these would be them. It is nigh impossible to discuss flood mitigation or flood risk in that city objectively after Katrina.

The author, Andy Horowitz (an assistant professor of history at Tulane), states his intent early: “I was briefly elated — and then, horrified — when, earlier this year, the federal government declared most of New Orleans safe from flooding.” At length, here is the cause for his concern:

All the Possible Ways

In 2014 Deloitte published a research paper entitled The potential for flood insurance privatization in the U.S. Could carriers keep their heads above water? A few days ago, we did an overview with a deep look at the key problem and solution. Today is a review of their survey of all the available ways that private flood can be introduced into the US market.

Below, in the graphic from Deloitte, are the ten possible ways for private flood insurance to happen, all plotted on a chart depicting increasing Ease of Implementation and Risk Sharing (page 11 of the report).

There they are: ten ways to introduce private flood. There might be more, but I can’t think of any. In the report, each is defined. Let’s take a look at a selection of them:

Flaws and All

In 2014 Deloitte published a research paper entitled The potential for flood insurance privatization in the U.S. Could carriers keep their heads above water? Despite the marks the authors might have lost in the “Title Brevity” category, they more than redeemed themselves in the all-important “Usefulness” category. This is a white paper that anyone underwriting, contemplating, competing with, or studying private flood should read, over and over. It is such a rich vein of material that The Risks of Hazard is going to write two posts on it this week. Today, we will provide an overview that includes a deeper look at the key problem and solution. Later this week, we will review their survey of all the available ways that private flood can be introduced into the US market. 

The title of the introductory section reveals the conclusion: Greater privatization may provide growth opportunities, but leveraging them might be problematic. It is a very safe, uncontroversial conclusion, which makes sense because it was written 2 years before the current private flood legislation is on its way to becoming law. The first half dozen pages of the report offer an orthodox summary and summation of the NFIP, its travails and its successes (yes, it has been a success for some – especially lenders).

Then it gets more interesting.

This week I attended the PCI National Flood Conference in Washington, DC (in Arlington, VA for geographic sticklers like me). Over the weekend, as everyone converged on the city, the sun was shining and the Potomac was sparkling as it flowed gently between its protected banks into Chesapeake Bay. It was a welcoming setting, especially for the delegation coming over from London – a significant number of underwriters and brokers from Lloyd’s.

With the published agenda occupied by 90 percent NFIP material meant to cover assorted minutiae of the program, what might these underwriters be doing there? Private flood is what they were doing there. The remaining 10 percent of the agenda addressed private flood topics, but it was the corridor talk that was predominantly about private flood.

This week saw the House Financial Services housing subcommittee receiving comments on H.R. 2901, the bill introduced last June to recognize private flood insurance as adequate to satisfy FEMA’s mandatory purchase requirements. Or, to paraphrase: “Legalize Cherry Picking!”

AM Best reported on the hearing on January 15 (mind the subscription wall), and, to my delight, they use the term “cherry picking.” While it’s a perfect name for the act of underwriting the best properties in the compulsive purchase NFHA, I hadn’t seen it in reputable media until now (except for Insurance Thought Leadership, where Nick Lamparelli and I put it).