Specialty Insurance

Reauthorization Looms for NFIP

Big storms add urgency to reforms on transparency and repeat claims.
By: | December 14, 2017 • 6 min read

In November, the U.S. House of Representatives voted to revamp the National Flood Insurance Program (NFIP).

While the Senate isn’t expected to pass its own revised version until sometime in 2018, the House version calls for greater private sector involvement in the writing of flood insurance and penalties for owners whose properties are the site of repeat flood claims.

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By one estimate, one percent of properties are responsible for 30 percent of all NFIP losses. Private insurers have long complained about a lack of transparency in pricing and transferring risk under the Federal program, which was founded some 50 years ago, because private sector insurers were unwilling to take on the risk.

Since the onslaught of Hurricanes Katrina and Rita in 2005, the program has struggled with debt. Congress in October forgave $16 billion in NFIP debt in an attempt to maintain the program in some state of viability.

According to Daniel Alpay, line underwriter, flood and household, Hiscox, the current situation with the NFIP is not dissimilar to the issues faced by the Terrorism Risk Insurance Act, another federally-backed insurance program.

“Both required reform, and both have experienced delays to reform with short-term extensions,” he said.

“We saw a few NFIP lapses and short-term extensions between 2008 and 2012, which led to mortgage market disruption and lenders demanding owners buy flood coverage for homes in high-risk areas, before the NFIP was finally re-authorized.”

Alpay added, “It’s anyone’s guess as to what will happen, but I would say it’s very possible that something similar [to what has happened before with NFIP] could happen again if there is still polarization in Congress.”

Access to Affordable Insurance

“Either way, consumers need clarity and access to affordable flood coverage as recent events have sadly highlighted,” he said. “There are too many consumers in the U.S. at risk of flood who are either not being adequately insured or else not being covered at all.”

Daniel Alpay, line underwriter, flood and household, Hiscox

Achieving bipartisan support is challenging, “but at the end of the day, U.S. citizens need to have sufficient access to affordable flood insurance,” Alpay said.

“The NFIP has played an important part in offering flood coverage to U.S. homeowners and businesses, but it is not sufficient on its own. It requires reform; it is no longer the self-sufficient insurance program that it was set up to be, given it is $25 billion plus in debt.”

Neal Conolly, now a director at ratings company Clearsurance, was the president of Wright Flood, the largest underwriter in the NFIP, until last year. He noted the October $16 billion loan forgiveness by Congress. That relief, plus a $22 billion line of credit at the Treasury, means there is “no financial issue continuing for NFIP.”

“Historically, the program was in balance for most of its 40 years of existence,” said Conolly.

“It was two storms, $17 billion of insured losses from Katrina and $7 billion from Sandy” that put the program under water.

He added that preliminary figures from Harvey will surpass Sandy with $10 billion in insured losses. Irma will be smaller at about $3 billion.

As important as those losses are, Conolly stressed a much larger point: “Coastal development generates half a trillion dollars in economic activity.”

That important economic engine would falter if the program were to be sharply curtailed. Instead he expects NFIP to be tweaked.

However, recent events “confirm that the U.S. flood risk is greater than the NFIP currently caters for or has the appetite to cater for,” said Alpay.

Public-Private Partnerships

“I don’t believe it can continue in its current form, but I do believe there is a role for the private flood insurance market. There are lots of examples where the public and private sectors have worked together, and this issue is too important for us not to.

“Flood is the most frequent natural disaster in the U.S., yet sadly 95 percent of all residential properties are currently uninsured.”

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In the past, flood was considered an uninsurable risk for private market insurers, but that may not be the case anymore thanks to improved modeling granularity, computational power and higher-resolution data.

Alpay said Hiscox has invested heavily in understanding and pricing U.S. flood, which is an extremely data-driven process.

“We have built a suite of flood insurance and reinsurance provisions,” he said.

“We have worked with independent hydrological model specialists, [and used] global imaging satellites and remote sensing experts to develop the underwriting platform. It has been peer-reviewed and approved by independent actuarial consultants.”

That said, private insurers such as Hiscox are not involved directly in efforts to reform the NFIP. Those are being led by political and academic groups.

“What we are doing is helping to raise awareness among consumers of the flood risk in so-called non-mandatory flood zones,” said Alpay. Several public policy associations have published analyses and position papers on NFIP reform, including the American Academy of Actuaries (AAA) and the National Association of Insurance Commissioners.

“NFIP is more than just profit and loss. It affects building codes, land use, mapping and funding.” — Rade Musulin, vice president of casualty, AAA

Rade Musulin, vice president of casualty, AAA said, “The program clearly has seen some problems, but NFIP is more than just profit and loss. It affects building codes, land use, mapping and funding.”

Climate change has become the major new variable in the equation, and Musulin does not dispute that.

Modern Risk Assessing Technologies

He hastened to add, “the key point to remember is that the technology around assessing risk is changing rapidly. That is what is opening opportunities for the private sector and is a key driver for revisiting the program. There were many strong reasons it was formed in the ’60s. But now we have CAT models, GPS mapping and big data. Flood risk may have been underestimated in some areas.”

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Advances in technology make underwriting and pricing risk more accurate and thus more palatable to the private sector.

“There are some provisions in the reform proposals that direct NFIP to release data,” said Todd Kozikowski, co-founder and chief revenue officer, Clearsurance.

“That includes loss data. NFIP has resisted this because the fear is that the private sector will cherry-pick the best or mispriced risks.”

He added that this is likely to happen to some degree, but the greater good of the competition will be a better differentiation of the risks, including inland from coastal.

Other sources have even suggested that the private sector cherry-picking the best business will then force higher deductions and premiums on the repetitive loss properties. Thus, either enforcing proper pricing on the risk or driving those properties out of the program.

The other technological development being brought to bear is crowdsourcing reviews.  Whether properties are FIP or privately insured, Kozikowski said,

“The mission is for insureds to make smarter decisions. We found that legacy reviews were 70 to 80 percent negative, which means they were not really helpful. People only reviewed when they had a complaint. Since we started our reviews, the same percentages are now positive.”

Carriers and brokers pay for granular Clearsurance surveys; insureds do not pay to make reviews. &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

As a professor of business, Jack Hampton knows firsthand the positive impact education has on risk managers as they tackle growing risks.
By: | April 9, 2018 • 4 min read

R&I: Who is your mentor and why?

Ellen Thrower, president (retired), The College of Insurance, introduced me to the importance of insurance as a component of risk management. Further, she encouraged me to explore strategic and operational risk as foundation topics shaping the role of the modern risk manager.

Chris Mandel, former president of RIMS and Risk Manager of the Year, introduced me to the emerging area of enterprise risk management. He helped me recognize the need to align hazard, strategic, operational and financial risk into a single framework. He gave me the perspective of ERM in a high-tech environment, using USAA as a model program that later won an excellence award for innovation.

Bob Morrell, founder and former CEO of Riskonnect, showed me how technology could be applied to solving serious risk management and governance problems. He created a platform that made some of my ideas practical and extended them into a highly-successful enterprise that served risk and governance management needs of major corporations.

R&I: How did you come to work in this industry?

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From a background in corporate finance and commercial banking, I accepted the position of provost of The College of Insurance. Recognizing my limited prior knowledge in the field, I became a student of insurance and risk management leading to authorship of books on hazard and financial risk. This led to industry consulting, as well as to the development of graduate-level courses and concentrations in MBA programs.

R&I: What was your first job?

The provost position was the first job I had in the industry, after serving as dean of the Seton Hall University School of Business and founding The Princeton Consulting Group. Earlier positions were in business development with Marine Transport Lines, consulting in commercial banking and college professorships.

R&I: What have you accomplished that you are proudest of?

Creating a risk management concentration in the MBA program at Saint Peter’s, co-founding the Russian Risk Management Society (RUSRISK), and writing “Fundamentals of Enterprise Risk Management” and the “AMA Handbook of Financial Risk Management.”

A few years ago, I expanded into risk management in higher education. From 2017 into 2018, Rowman and Littlefield published my four books that address risks facing colleges and universities, professors, students and parents.

Jack Hampton, Professor of Business, St. Peter’s University

R&I: What is your favorite book or movie?

The Godfather. I see it as a story of managing risk, even as the behavior of its leading characters create risk for others.

R&I: What is your favorite drink?

Jameson’s Irish whiskey. Mixed with a little ice, it is a serious rival for Johnny Walker Gold scotch and Jack Daniel’s Tennessee whiskey.

R&I: What is the most unusual/interesting place you have ever visited?

Mount Etna, Taormina, and Agrigento, Sicily. I actually supervised an MBA program in Siracusa and learned about risk from a new perspective.

R&I: What is the riskiest activity you ever engaged in?

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Army Airborne training and jumping out of an airplane. Fortunately, I never had to do it in combat even though I served in Vietnam.

R&I: If the world has a modern hero, who is it and why?

George C. Marshall, one of the most decorated military leaders in American history, architect of the economic recovery program for Europe after World War II, and recipient of the 1953 Nobel Peace Prize. For Marshall, it was not just about winning the war. It was also about winning the peace.

R&I: What about this work do you find the most fulfilling or rewarding?

Sharing lessons with colleagues and students by writing, publishing and teaching. A professor with a knowledge of risk management does not only share lessons. The professor is also a student when MBA candidates talk about the risks they manage every day.

R&I: What is the risk management community doing right?

Sensitizing for-profit, nonprofit and governmental agencies to the exposures and complexities facing their organizations. Sometimes we focus too much on strategies that sound good but do not withstand closer examination. Risk managers help organizations make better decisions.

R&I: What could the risk management community be doing a better job of?

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Developing executive training programs to help risk managers assume C-suite positions in organizations. Insurance may be a good place to start but so is an MBA degree. The Risk and Insurance Management Society recognizes the importance of a wide range of risk knowledge. Colleges and universities need to catch up with RIMS.

R&I: What emerging commercial risk most concerns you?

Cyber risk and its impact on hazard, operational and financial strategies. A terrorist can take down a building. A cyber-criminal can take down much more.

R&I: What does your family think you do?

My family members think I’m a professor. They do not seem to be too interested in my views on risk management.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]