As federal subsidies for flood insurance are reduced and the cost of government provided insurance goes up, the demand for private flood coverage could also rise, according to Fitch Ratings.

However, it remains to be seen if the private reinsurance or insurance markets would be able to provide sufficient capacity for flood risk at an economically viable price, the ratings agency added.

The reduction or elimination of federal assistance would create a potential opportunity for traditional private (re)insurers or alternative capital markets to serve this sizable market, according to Fitch.

The private insurance market does currently provide coverage for flood risk, but it is generally limited to commercial flood policies and excess homeowners flood coverage above the maximum $350,000 of building and contents coverage provided by the National Flood Insurance Program (NFIP).

The Flood Insurance Agency, located in Gainesville, Florida, is now selling private flood insurance underwritten by Lloyd’s of London in 15 states and making it available to commercial risks and apartment buildings.

Also in Florida, Homeowners Choice Property and Casualty Insurance Co. is offering a flood insurance endorsement for its existing 140,000 homeowners policies that the company says will cost the same as what homeowners have been paying for their NFIP policies.

While private (re)insurers have the capacity to provide coverage for flood risk, Fitch says they need to be able to charge actuarially sound rates to be willing to write significant amounts of risk. Flood has traditionally been viewed as an uninsurable risk, requiring the need for a government solution to cover the flood exposures of individual property owners.

However, Fitch said, more sophisticated risk mapping and modeling tools have been developed in recent years, so that the private industry is more willing to provide coverage and able to more accurately price the risk.

The federal government has provided funding for flood losses in recent years. The NFIP has accrued a debt of $24 billion due to claims from Hurricanes Katrina and Rita in 2005 ($22 billion), Hurricane Ike in 2008 ($3 billion), and most recently Hurricane Sandy (about $15 billion) in 2012.

Lawmakers looked for ways to reduce the program’s risk, which resulted in the Biggert-Waters Flood Insurance Reform Act of 2012. This law phases out the federal government’s support for flood insurance policies and requires a study of the private reinsurance market capacity to assume a portion of the NFIP insurance risk.

Concern about increased premium rates resulting from Biggert-Waters has caused Congress to reconsider its implementation. The House and Senate have both passed bills to reverse some of the changes brought about by Biggert-Waters.

Several states, including Florida and West Virginia, have recently advanced legislation to increase the availability of private flood insurance.

Also, five federal regulatory agencies are considering a rule that could boost sales of private flood insurance. The proposal would require lenders to accept private flood policies to satisfy the mandate that certain homebuyers in flood hazard areas purchase flood insurance.

A recent Government Accountability Office (GAO) report, “Strategies for Increasing Private Sector Involvement,” found that even if private insurers can be brought into the flood insurance market, the government will still have to play a role or several roles as reinsurer, residual market, subsidy provider or mitigation enforcer.

The GAO said the obstacles to more private insurer involvement include political and consumer resistance to full cost-based pricing of flood risks, a resistance demonstrated by the current attempts in the Senate and the House to roll back rate increases called for under the Biggert-Waters law.

The efforts to delay Biggert-Waters “may reinforce private insurers’ skepticism that they would ever be permitted to charge adequate rates and make their participation unlikely in the foreseeable future,” the GAO report concluded.

Source: Fitch Ratings

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