Private insurers want to provide flood insurance. However, neither the political administration in the US nor the consumers seem to be interested in full-cost based insurance plans.
The National Flood Insurance Program (NFIP) has run up a debt of $24 billion. This has forced taxpayers to demand the elimination of subsidized premium rates and active participation of the private sector. The common consensus is that property owners, and not taxpayers, should bear the cost of flood insurance.
Abolishing subsidized rates was one of the suggestions put forward by the Biggert-Waters Flood Insurance Reform Act of 2012. In its latest report, the Government Accountability Office (GAO), too, has recommended that the government eliminate subsidized rates and charge full-risk premiums to all policyholders. In order to improve affordability, the government has to offer funds to provide subsidies to eligible policyholders.
NFIP premiums don’t cover costs because this program was not launched to make profits. Its sole objective was encouraging the participation of home owners in flood insurance programs.
The program mainly targeted people living in high-risk areas. About 20% NFIP policies have subsidized rates.
Attracting private sector
In order to encourage private participation, several conditions need to be met. For example, the insurers should be able to properly assess the risk and determine premium accordingly. This requires access to NFIP policies and claims data.
The insurers should be able to charge premiums that accurately reflect the risk of flood losses. The insurer should also have the right to accept or reject applications.
Several property owners don’t buy flood insurance. If there isn’t sufficient consumer participation, the insurer may not be able to diversify their risk. The following strategies may help the participation of private insurers.
The NFIP policies should charge full-risk premiums.
The government can arrange funds to provide subsidies to property owners who cannot afford the full rates. This will make it easier for the private sector to participate because their premiums will not be significantly higher than those charged by NFIP.
NFIP should provide residual insurance
The government should be ready to insure properties carrying higher than normal levels of risk. The private sector may not be ready to provide coverage in these cases.
NFIP should act as a reinsurer
The government can act as a reinsurer and charge a premium for bearing the risk. However, in this case, the insurer may pass the cost of reinsurance premium to the consumer.
The federal government will still have many roles to perform under every scenario. And as the participation of private sector increases, the government can use its resources to create risk awareness among people, encourage mitigation, enforce building codes and oversee land use agreements.
Private insurance companies need comprehensive information and more accurate modeling to properly assess flood risk. Risk modeling firms are expected to release new risk models in the coming years.
Insurers should be able to accept or reject applicants to mitigate their risk. They should have the freedom to limit or reduce the number of flood insurance policies in a particular locality.
The insurer needs a vast and diverse pool of policies. If only high risk properties are insured, the insurer will not be able to properly manage their risk.
Even in the Special Flood Hazard Areas, the NFIP participation was just 50% in 2006. In these areas, homeowners who obtained mortgages from federally insured lenders had to buy flood insurance. Participation rates outside SFHAs were just 1%.
And the people who brought these policies usually cancelled after 2-4 years.
Affordability and perception of risk
People seem to believe that if their properties are not located in SFHAs, they don’t face the risk of flooding. Many homeowners also believe that their homeowners policy provides coverage against flood loss. There are also homeowners who believe that they will receive government assistance if they suffer flood damage.
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