Inspecting the NFIP’s lamentable previous and why change is sorely wanted
The National Flood Insurance Program (NFIP) What Established with the Passing of the National Flood Insurance Act (NFIA) of 1968, with the Aim of Protecting Americans Against The Financial Hardship of Flooding.
Congress Enected the NFIP to Mitigate Increases in Federal Disaster Assistance Search as the Costly Floods of the Early 1960s, Particularly Along the Mississippi River and To Distribute The Cost Of Flooding More Equitly. At the time, flood was viewed as an almost uninsurable risk and coverage was virtually unavailable from private insurance markets because, at that time, the United States had no reliable methods to assess flood risk at the parcel level. In Fact, Very Few Flood Zones Had Been Designated at the City Or County Level. This MEANT that Insurers were exposed to Severe adverse selection as only the own of the most flood exposed structures would purchase coverage.
The NFIP WAS ESTABLISHED WITHREE MAIN Objectives: To Provide Access to Primary Flood Insurance Coverage, Mitigate and Reduce The Nation’s Comprehensive Flood Risk Risk Mapping and Floodplain Management and Therby, Over Time, Provide Private Insurer With The Data and The Experience Needed To unburden TaxPayers through Market-Based Pricing of Flood Risk.
When the nfia was Drafted, Congress Allowed for Two Operational Possibilities for the NFIP: Plan A, which Permitted the Private Insurance Industry to Implement and Operate Insurance Program with Limited Federal Involvement; And Plan B, which Placed Primary Responsibility for the NFIP with the Department of Housing and Urban Development (Hud) and Subsequently the Federal Emergency Management Agency (Fema).
From 1968 to 1977, The NFIP used plan A, Operating Primarily Through a Pool of Private Insurers Represented by the National Flood Insurers Association, With Limited Supervision from the Department of Housing and Urban Development (Hud) and Financial Support From The Us Treasury, What Essentiallly Served as a Reinsurer.
Read next: NFIP “Impeding Access” to the private flood Insurance Market – Poulton Associates CEO
However, After a Series of Disputes Between the Private Insurance Pool and The Government on Issues of Authority, Financial Control, and Other Operating Matters, Hud Asserted Control Over The Program Which Completed Legal Action On The National Flood Insurers Association Which Contended IT should remain in control. The Courts Allowed Hud to Begin Operating the Program, which Ended the National Flood Insurers Association and Ushered in the Effective Nationalization of America’s Flood Insurance Program. At the time, it was unlikely that anyone anticipated the financial disaster that would flow from these events, according to craig poulton (picture), ceo of poulton associates and owner of catcoverage.com
“What few people know is that the NFIP was only dozed to run [under Plan B] Until 1997, “Said Poulton. “The idea of the original legislation was to create conditions where, under government participation, would facilitate a takeover by the private market so that the government could exit the flood insurance business, not retain it.”
However, The Us Has Maintained A Nationalized Flood Insurance Construct Ever Since 1977 – and with “Disastrous” Consequences, According to Poulton, Who Heavily Criticized the Programs Moves to Maintain A Flood Insurance Monopoly As ITS Inadequate Rates. He said: “The NFIP has been reauthorized over and over again because it convinced Congress there was nobody to take its place, and to date, it continues to underprice its product so that no-one will want to take its place to the severe detriment of tax payers.”
The NFIP is found primary from premiums, fees, and Surcges Paid by Nfip Policyholder, but it can borrow from the treasury to pay claims after extreme events. Historically, the NFIP would borrow small amounts and then repay the loans with interest, but everything changed after hurricanes Katrina, Rita, and Wilma in 2005, when Congress had to increase the NFIP’s borrowing limit to $20,775 billion to pay claims.
“Over the Next Decade, The NFIP’s DeBt Continued to Grow, and Congress Kept Bumping Up the Borrowing Limit,” Explained Poulton. “When hurricanes Harvey, Irma, and Maria hit in 2017, it was clear the NFIP would need to have the debt ceiling raised even further, so Congress decided to turn part of the debt into a tax by simply forgiving $16 billion which replenished the NFIP borrowing authority.
“But there was no requirement from Congress that the NFIP act any differently to receive that $16 billion in forgiveness. That is money the taxpayer will never see again, and we can expect more of the same unile the nfip raises their rates to an actuarialy sustainable level. Frankly, They Could Have Easily Achieved Rate Adequacy, Paid Off Their Debet and Stoped Incurring More if they had raised their rates as intended by congress over the past decade. Fortunately, the NFIP now has a mechanism to achieve actually defensible rates with Risk Rating 2.0.”
read more: An ‘Equitable’ Alternative to NFIP’s Risk Rating 2.0 Construct
The NFIP’s New Pricing Methodology, Called Risk Rating 2.0, is aimed at Reflecting to Individual Property’s Specific Flood Risk, AS Opposed to Using General Risk Categories Based on Location and Property Type. The upgrade is intended to product rates that are more equitable, and to inform policyholders of their true flood risk through through accurate premiums.
“The NFIP now has a mechanism to raise rates relatively fairly,” Poulton told Insurance Business. “They have the flood mapping authority to double their premium at Those Better Rates, which would go a long way Toward Enabling the Original Intent of Reducing The TaxPayer Funding of Flood Losses.”
Poulton is calling on the nfip to start acting more like an Insurer of Last Resort and Less Like a Monopoly Bent on Preserving Its Position at the Expense of the Public Good. According to Poulton, the NFIP REFUSAL to Return Any Premium to a PolicyHolder Who Want to Switch to a private market Insurer midterm, and their continued use of Woefully Inadequate Rates, are just Two Examples of the NFIPS EFFORTS to Impede private market flood. This, He Says is Needlessly Increasing the Burden Shouldered by Us TaxPayers, While Exacerbating America’s Flood Insurance Protection Gap Nationwide.
Craig Poulton ([email protected]) is chief executive officer of salt lake city-base poulton associates, which Administry Various Catastrophe-Related Insurance, including the Country’s Largest Private Flood Insurance Program, The Natural Catstrophe Insurance Program at Catcoverage.com.