U.S. House Insurance Subcommittee Hears Testimony on Creation of ‘More Robust’ Private Market Flood Insurance

 

Relying on the state-based insurance regulatory system to oversee the delivery of property insurance coverage for flood insurance by private insurers would be the best way for Congress to move federal government expenditures and activities towards investments in resiliency and sustainability related to flood risk, Center for Economic Justice Director Birny Birnbaum testified at a Congressional hearing today, January 13, 2016.

Held by the U.S. House Financial Services Subcommittee on Housing and Insurance, the hearing explored development of a “more robust” state-regulated private flood insurance market.  It also considered the ramifications of H.R. 2901, the Flood Insurance Market Parity and Modernization Act introduced by Representatives Dennis Ross and Patrick Murphy on June 25, 2015.

H.R. 2901 would amend the Flood Disaster Protection Act (“FDPA”) to clarify that flood insurance offered by a private carrier outside of the National Flood Insurance Program (“NFIP”) can satisfy the FDPA’s mandatory purchase requirement.  It would define “acceptable private flood insurance” as a policy providing flood insurance coverage that is issued by an insurance company that is licensed, admitted, or otherwise approved to engage in the business of insurance in the state or jurisdiction in which the insured property is located.  Under H.R. 2901, an acceptable private flood insurance policy could also be issued by an insurance company that is eligible as a non-admitted insurer to provide insurance in the state or jurisdiction where the property to be insured is located.  If enacted, the legislation would provide consumers with private sector alternatives to the NFIP, with the intention of reducing flood insurance premiums through greater competition.

Joining Mr. Birnbaum on the witness panel was Pennsylvania Insurance Commissioner Teresa D. Miller, who testified on behalf of the National Association of Insurance Commissioners (“NAIC”).

Affirming the NAIC’s support for H.R. 2901, Commissioner Miller said:  “Facilitating increased private sector involvement in the sale of flood insurance will help promote consumer choice and spur competition.  The legislation will ensure that state insurance regulators have the flexibility to approve private flood insurance coverage that is responsive to the needs of their states and constituents while complying with state regulatory requirements.”

The Flood Insurance Market Parity and Modernization Act was introduced to help facilitate the development of the private flood market and address some of the unintended consequences resulting from the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters). Provisions of Biggert-Waters have made it more difficult for companies to offer private flood insurance products.

The legislation addresses NAIC concerns with language in the Biggert-Waters Flood Insurance Reform Act of 2012 that empowered federal banking and housing regulators to apply their own requirements related to the financial solvency, strength or claims-paying ability of private insurance companies from which they will accept private flood insurance.

“This is highly problematic as banking and housing regulators neither have the expertise nor the experience to regulate insurance companies or insurance markets,” Commissioner Miller said. “It is inappropriate for them to be given the authority to substitute their judgement for those charged under law with regulating insurance products and protecting policyholders.”

H.R. 2901 includes language clarifying that state insurance regulators have the same authority and discretion to regulate private flood insurance as they have to regulate other similar insurance products and markets.

“One of the obstacles that we’ve seen is that many lenders are reluctant to issue mortgages for homes with private flood insurance, because they are not sure the coverage meets the requirements of the federal government,” she added.  “H.R. 2901 would remove that obstacle by requiring lenders to accept private flood insurance if it meets certain coverage criteria and is subject to supervision by state insurance regulators.”

In his written testimony, Mr. Birnbaum agreed that private insurers can and should offer property insurance covering the peril of flood.  He outlined current problems relating to the NFIP:

• Relatively few homeowners and businesses are purchasing flood insurance and consequently are relying on disaster relief or savings to recover from flooding events.
• Individuals and businesses making investment decisions about property purchases are receiving “improper pricing signals” (lack of rate adequacy).
• There are inadequate incentives for loss mitigation due to these subsidized rates.
• Federal expenditures for disaster relief leave individuals and communities more susceptible to future loss instead of more resilient and sustainable.
• Subsidies are sometimes given to consumers who do not need financial assistance.  Conversely, there is a lack of or inadequate government assistance for those who do need financial assistance to purchase flood insurance or invest in flood mitigation.
• Subsidies by some taxpayers are paid for other taxpayers in the offer of and cost to deliver flood protection.
• There is inefficient delivery of coverage for flood, with additional administrative costs for private insurers to sell the NFIP policy separate from the standard residential or commercial property insurance policy.
• There is a lack of standard insurance consumer protections for NFIP customers that are found in state regulation of residential and commercial property insurance.
• Lack of a residual market for flood insurance leaves force-placed flood insurance as the de facto residual market.

While insurers can and do handle catastrophe risk by diversifying across multiple perils and broad geographic distribution of policies and by purchasing reinsurance and other forms of catastrophe protection like catastrophe bonds, the potential for a flood event causing massive damage does deter private insurers from insuring flood risk, Mr. Birnbaum added.  To address this concern and to promote private market sale of flood insurance, Congress should transform the NFIP from a direct provider of insurance to a reinsurer for mega-catastrophic flood events similar to the Terrorism Risk Insurance Program (“TRIP”), which provides reinsurance for mega terrorist events with the federal government’s responsibility beginning only after private insurers have incurred a certain level of claims/losses from such an event.

Effecting the following four key actions by 2017 would get private insurers in the business of providing flood insurance, while redirecting the federal government’s focus to flood risk mitigation, Mr. Birnbaum said:

1.  Get the NFIP out of the business of being a flood insurance company by requiring that residential and commercial property insurance policies sold by private insurers (and some state residual market insurers) cover the peril of flood. This requirement turns flood insurance back to the states–where all other property insurance products and markets are regulated–and back to private insurers, reinsurers and catastrophe modelers, who have the capability and capital to provide flood coverage more comprehensively and efficiently than the Federal government. 

2.  Transition the NFIP from a direct provider of insurance to a mega-catastrophe reinsurer by utilizing the Terrorism Risk Insurance Program as a model. 

3.  Address the affordability problem of flood insurance with federal, state and local assistance outside of the insurance system–no subsidies in insurance pricing–with an overwhelming emphasis on assistance for loss mitigation as the tool to create more affordable premiums. 

4.  Re-authorize the NFIP to continue the sale of flood insurance during a finite transition period toward coverage of flood risk in residential and commercial property insurance policies sold by private insurers and state residual markets overseen by state insurance regulators.

Hyperlinks to ndividual written testimonies are provided below:

• Ms. Teresa D. Miller, Commissioner, Pennsylvania State Insurance Department, on behalf of the National Association of Insurance Commissioners
• Mr. Steve Bradshaw, Executive Vice President, Standard Mortgage Corporation, on behalf of the Mortgage Bankers Association
• Mr. Brady Kelley, Executive Director, National Association of Professional Surplus Lines Offices, Ltd.
• Mr. Birny Birnbaum, Executive Director, Center for Economic Justice

Click here for the House Financial Services Subcommittee on Housing and Insurance Memorandum on today’s hearing.

 

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