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Specialty Insurance

Reauthorization Looms for NFIP, Calls for Greater Private Sector Involvement

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

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]