21st century approach needed for NFIP reform

The recent Mississippi River flooding of communities and towns is a reminder that more than levees need reform and repair.  For a true 21st Century approach to flood safety, the National Flood Insurance Program (NFIP) also urgently needs a fix. It is imperative that Congress act immediately to reform the NFIP to better reflect the rising risks of flooding, shift more of this exposure from the public to the private sector, and explicitly seek to protect taxpayers nationwide.

The NFIP’s ability to provide flood insurance is in jeopardy – In fact, the program is in so much trouble that it cannot even cover its losses without borrowing from the U.S. Treasury and increasing the government’s debt burden. The NFIP’s growing $18 billion debt puts taxpayers across the country on the hook regardless of where they live. Moreover, experts warn that the NFIP’s rates and mapping fail to reflect the best available information and data regarding flood risk and might even be inadvertently encouraging homeowners to put their families in harm’s way.

Fortunately, Congress has taken notice. Recently, the House Financial Services Committee on a bipartisan, unanimous basis approved reform legislation offered by Rep. Judy Biggert (R-Ill.), which would begin the process of fixing the NFIP. Though the legislation is a solid first step, its reinsurance provisions must be strengthened to restore soundness and fairness to this broken program. 

Reinsurance is critical to insurers and state-based property insurance programs as it helps them manage the cost of natural catastrophe risk. This vital risk management instrument – insurance for insurers – helps insurance companies improve their capacity and financial performance, enhance financial security, and reduce financial volatility. 

By spreading the risk of losses from large events, like floods, across multiple companies on a global scale, reinsurers help make coverage for severe risks more affordable than if they were concentrated in one company.  Reinsurance is especially important to help protect against the severe risks of natural catastrophes, such as hurricanes, that can cause many billions of dollars of damage. 

Reinsurers not only help protect private insurance companies, they provide important financial coverage to public sector pools such as the Texas Windstorm Insurance Association, the Florida Citizens Property Insurance Company, the North Carolina Beach Pool, the Massachusetts Fair Plan, and the California Earthquake Authority.  Abroad, payments by global private reinsurers to the New Zealand state Earthquake Commission, as well as to private New Zealand insurers, have been so significant that they have helped transform a large government budget deficit into a projected surplus.

Reinsurers have helped American citizens recover from every major non-flood natural catastrophe over the past century.  For example, sixty percent of the losses related to the events of September 11 were absorbed by the global reinsurance industry. In 2005, 61 percent of Hurricanes Katrina, Rita and Wilma losses were ultimately borne by reinsurers. In 2008, approximately one-third of insured losses from Hurricane Ike and Gustav were reinsured. On the global stage, where floods are primarily covered in the private markets, flood-stricken regions have similarly benefitted from reinsurance, most recently in the tragic Australian floods, where reinsurance payments have already begun to help communities and families rebuild.

Greater private market participation in the U.S. flood arena will not only better protect Americans from the next storm, it will help us to plan for it. As the General Accounting Office has shown, introducing private-sector risk assessment into the NFIP process would help bolster land use planning and hazard mitigation by sending clearer signals on risk and remediation.

America deserves a flood policy that works. As Congress moves forward with much-needed NFIP reform, it is critical to pass reforms that bolster the program’s fiscal soundness to make the NFIP viable for its participants and more equitable for taxpayers across the country. The time for Congress to act is now.

Frank Nutter is the president of the Reinsurance Association of America.