ABIR: Sandy providing impetus for flood programme reform

Supporters of the Biggert-Waters Flood Insurance Reform Act 2012 received added impetus following Sandy, with skirmishes in Congress over rate-adequate pricing, increased risk transfer into the private sector and the sustainability of the existing programme being shaped by the storm.

That is the view of Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR), who said that while there has been wrangling over the implementation of Biggert-Waters, the general consensus—helped in part by Sandy—is that planned reforms need to press ahead.

The NFIP extends 5.6 million policies providing more than $1.2 trillion of coverage, according to statistics from the Federal Emergency Management Agency (FEMA), but its position has become increasingly untenable. Kading said that post-Sandy the NFIP was obliged to raise the borrowing authority by a further $9 billion in order to pay claims. The NFIP is now around $26 billion in debt, with Sandy helping to focus people’s minds on future debt obligations associated with the programme, said Kading.

This has in turn raised three key talking points. First among these is the need for rate-adequate pricing. A stepped approach has been established under Biggert-Waters—a 25 percent annual increase until risk-based pricing is achieved—but political opposition has sought to derail the reform. Kading said Republicans in Congress are however fighting to defend the changes. He said the Sandy experience was such that they are digging in against any roll-back of rate increases.

Kading added that despite the political and public noise around reform, those in Sandy-affected areas such as New York and New Jersey have lent their support to the bill. Governors Chris Christie and Michael Bloomberg evidently recognise the value of the bill and the need for reform, he said.

Second, Sandy has also helped to sharpen minds regarding the role private reinsurance can play in supporting the US flood programme. Kading said that private involvement was considered positively by those who wrote the legislation, but added that the FEMA was taking a rather more conservative view of private sector involvement. FEMA will await the results of research into reforms to the flood programme, said Kading, which will begin in September. Final results will be published in a year, but intermediary findings will be made public in the interim. Kading explained that the case could be made for a private reinsurance element right now, but said that FEMA is awaiting the cost: benefit analysis from the report.

Finally, Sandy and the mounting debt bill have encouraged a rethink regarding the viability of the existing flood programme. Suggestions pre-Sandy that there would be federal forgiveness of the debt evaporated following the storm, with decision-makers in Congress unwilling to grant such a move, said Kading. This will necessarily force change.

Greater risk transfer into the private sector is perhaps the most obvious answer—if not a solution—to the mounting debt issue. As Kading explained, private involvement would reduce the likelihood of future debt issuance, even if it does not solve the problem of paying off the existing debt. Events such as Sandy have certainly helped to focus minds and it seems likely that a more significant private component to US flood insurance provision is in the offing. The results of the research report into flood insurance reform will undoubtedly be anticipated with interest.

Supporters of the Biggert-Waters Flood Insurance Reform Act 2012 received added impetus following Sandy, with skirmishes in Congress over rate-adequate pricing, increased risk transfer into the private sector and the sustainability of the existing programme being shaped by the storm.

That is the view of Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR), who said that while there has been wrangling over the implementation of Biggert-Waters, the general consensus—helped in part by Sandy—is that planned reforms need to press ahead.

The NFIP extends 5.6 million policies providing more than $1.2 trillion of coverage, according to statistics from the Federal Emergency Management Agency (FEMA), but its position has become increasingly untenable. Kading said that post-Sandy the NFIP was obliged to raise the borrowing authority by a further $9 billion in order to pay claims. The NFIP is now around $26 billion in debt, with Sandy helping to focus people’s minds on future debt obligations associated with the programme, said Kading.

This has in turn raised three key talking points. First among these is the need for rate-adequate pricing. A stepped approach has been established under Biggert-Waters—a 25 percent annual increase until risk-based pricing is achieved—but political opposition has sought to derail the reform. Kading said Republicans in Congress are however fighting to defend the changes. He said the Sandy experience was such that they are digging in against any roll-back of rate increases.

Kading added that despite the political and public noise around reform, those in Sandy-affected areas such as New York and New Jersey have lent their support to the bill. Governors Chris Christie and Michael Bloomberg evidently recognise the value of the bill and the need for reform, he said.

Second, Sandy has also helped to sharpen minds regarding the role private reinsurance can play in supporting the US flood programme. Kading said that private involvement was considered positively by those who wrote the legislation, but added that the FEMA was taking a rather more conservative view of private sector involvement. FEMA will await the results of research into reforms to the flood programme, said Kading, which will begin in September. Final results will be published in a year, but intermediary findings will be made public in the interim. Kading explained that the case could be made for a private reinsurance element right now, but said that FEMA is awaiting the cost: benefit analysis from the report.

Finally, Sandy and the mounting debt bill have encouraged a rethink regarding the viability of the existing flood programme. Suggestions pre-Sandy that there would be federal forgiveness of the debt evaporated following the storm, with decision-makers in Congress unwilling to grant such a move, said Kading. This will necessarily force change.

Greater risk transfer into the private sector is perhaps the most obvious answer—if not a solution—to the mounting debt issue. As Kading explained, private involvement would reduce the likelihood of future debt issuance, even if it does not solve the problem of paying off the existing debt. Events such as Sandy have certainly helped to focus minds and it seems likely that a more significant private component to US flood insurance provision is in the offing. The results of the research report into flood insurance reform will undoubtedly be anticipated with interest.