Flood reform a major opportunity
With significant levels of convergence capital entering the cat market and reinsurers looking to take on more flood risk, there are significant opportunities for premium growth and risk mitigation if the industry and Congress can grasp the nettle of reform.
That is the opinion of Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, who said that now is the ideal time to redesign the National Flood Insurance Program (NFIP).
He added that convergence capital has the potential to accelerate much-needed reform and deliver the kind of capital necessary to accelerate the privatisation of the NFIP. The question remains whether the political will to reform the NFIP will be sustained.
As Kading explained: “The Biggert-Waters Act has been a positive step towards sustainability. However, many of the rate increases were more than was anticipated and there may yet be Congressional moves to derail the act.
“The question is whether Congress will deal intelligently with the issue of Biggert-Waters and the reform of the NFIP, or whether it will move to block the measures.”
There was appetite among reinsurers to take on flood risks currently under the federal programme, but there would need to be more freedom of “rate and form”, both on the insurance and reinsurance side of US flood, he continued. This will likely again depend on political will.
Kading said that the current programme subsidises consumers regardless of circumstance, and argued that if the NFIP is to persist with reforms implemented, it will need to take a more targeted approach to the provision of subsidies.
“The problem with the existing state and federal programmes is that they provide coverage to everybody. If you want to provide an insurance subsidy, you should provide it in a means-tested fashion and in a way that does not distort market pricing,” said Kading, adding that federal support should be extended only to those with a real need.
“Prices paid should reflect the risk; there should not be a disconnect,” said Kading, adding that subsidies should be available to fishing families or those in local government jobs that have a logical reason to live in the area, and not to those who live in a high-risk area by choice.
Kading added that the debt associated with the NFIP, which has reached $25 billion and would likely rise in the event of another major cat event, has created an unhelpful focus on debt refinancing, rather than an exploration of the means to reduce flood risk.
“Money from the NFIP should be addressing risk management. It would be much better if those debt mechanisms could be focused on risk mitigation, rather than subsidisation of insurance premiums.”
“$25 billion on risk mitigation means better dune protection systems, elevation grants for people to raise homes in flood zones, and the buy-out of properties that are subject to repeat flooding. That’s a much better use of the scarce funds available and provides long-term value.”