When the National Flood Insurance Program was hatched back in the 1960's the profession of risk mapping and modeling was nowhere near as sophisticated as it is today. So it's believable that the private sector would have viewed flood peril then as a risk that was too unknown to underwrite.
Thus, the responsibility for underwriting that risk fell to the federal government, where it has largely remained since. According to the Center for Risk Management and Decision Processes at the University of Pennsylvania's Wharton School, the NFIP provided 5.6 million policy holders flood insurance in 2010, garnering $3.3 billion in premiums.
That would be nice if it weren't for the fact that the program's outstanding debt from claims payments and accrued interest, according to Wharton, were at $17.8 billion as of Dec. 15, 2011, stemming from losses in Katrina, Irene etc.
Clearly, too much of the burden of paying for flood risk has fallen on the shoulders of U.S. taxpayers and their already debt-ridden federal government. Enough has changed in mapping and modeling that the private sector, that means insurers, can and should take on more of this risk.
There are two very large benefits to consider here. According to Wharton, more people would be covered if insurers were to take this risk on in a measured way, and insurers would do more business, picking up more premium.
The insurers are much better off in terms of understanding the risk than they were more than 40 years ago, when the NFIP was born. They are ready and willing to take more of this risk on. Just witness the announcement by Zurich in late May that it was teaming with SWBC to offer excess flood insurance in all 50 states.
As with any policy argument, the question is not that change should occur. When it comes to the U.S. government and is staggering debt, change must occur. The question is how fast should change occur and according to whose terms?
When it comes to the National Flood Insurance program, inertia should not rule the day. The private sector has changed rapidly and for the better since 1968. It can better map this risk and can take it on responsibly.
I'm not suggesting that the NFIP be dropped cold and the private sector shouldered into the void in the space of a year or even five years. But elected officials should get educated about what the private sector can do in this regard and let it bid on a nice chunk, say in increments of 10 percent per year over the next ten years, of those 5.6 million policies that the federal government now holds.
DAN REYNOLDSis managing editor of Risk & Insurance®. He can be reached at firstname.lastname@example.org.
July 24, 2012
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