• ABIR Supports Legislation Transferring Risk from the NFIP to the Private Sector; and Removing Red Tape That Limits Ability of Private Insurers to Write Flood Insurance

    Climate Change | Statements / Letters | 04.05.2016

    April 5, 2016
    NAIC Hearing

    ABIR Supports Legislation Transferring Risk from the NFIP to the Private Sector; and Removing Red Tape That Limits Ability of Private Insurers to Write Flood Insurance

    On behalf of the members of the Association of Bermuda Insurers and Reinsurers (ABIR) we speak in favor of policy changes that remove regulatory red tape to allow private insurers to voluntarily write more flood insurance; and that encourages the US National Flood Insurance Program (NFIP) to continue on a necessary and essential pathway to risk based pricing that will encourage transfer of risk to private insurance markets.

    The three principal factors creating an opportunity for policymakers to increase flood insurance penetration in the private sector are: 1) development of new flood catastrophe models; 2) the NFIP’s glide path to risk based pricing, and 3) abundant capital willing to take on catastrophe risk.  Appropriate policymaker action can increase the flood insurance penetration in the US and that will lead to better protection for consumers in a more competitive insurance market than previously has been the case. The principal impediments to making these changes include:  1) federal regulation that creates ambiguity as to whether private flood insurance can be used to meet federal mortgage market requirements; 2) actions that may inhibit the current risk based pricing glide path applicable to the NFIP; 3) restrictive rate and form regulation that discourage innovation and experimentation in some states; and 4) the potential for tax or regulatory restrictions that impede cross border trade and limit the ability of global insurance groups to pool risk to achieve diversification benefits.

    ABIR members today write flood insurance in several ways, but principally on commercial insurance contracts, in surplus lines markets and in reinsurance markets. We offer these recommendations to the NAIC Property and Casualty Insurance Committee on how to improve flood insurance markets which we believe will be beneficial for consumers:

    1. Continue work to support the Ross-Murphy bill, H.R. 2901; the NAIC’s statements in support are important to demonstrate that private insurance markets can well serve consumers under appropriate state regulation.
    2. Engage with members of the US House Financial Institutions Committee which has begun work on NFIP reauthorization legislation and is interested in advice on how to expand consumer flood insurance markets. Risk based pricing in the NFIP is critical to provide incentives for designing in resilience into construction and for supporting Mother Nature’s flood protection systems.
    3. Move from the current opaque subsidies which provide below cost insurance for people regardless of their means to ones that are transparent and focused on subsidies for low income individuals. Insurance regulators are good advocates for redesign of the elements of the NFIP. Over time, risk based pricing will encourage risk to be moved to the private sector. At the same time some subsidies will be needed in the NFIP to protect the interest of low income consumers who need flood insurance. The NFIP is needed but over the long haul it likely is best designed as a residual market that protects people that cannot buy flood insurance in private markets.
    4.  Continue along the current NFIP glide path to risk based pricing – this is essential if private sector insurance utilization is the goal.  Private insurers will underwrite risk better than the NFIP. In many areas today private insurers cannot compete with the NFIP due to the continued subsidization in NFIP rates; in other areas private insurers can compete as evidenced by Wharton research, individual insurer commentary and by press reports.
    5. Purchase private reinsurance for the NFIP – this will reduce the burden on federal taxpayers which now are shouldering $23 billion in debt for the NFIP.
    6. Focus scarce federal resources on designing and building in resilience in infrastructure and creating incentives for consumers to protect themselves via pre-event insurance and risk mitigation rather than over-reliance on post event disaster aid.

    ABIR members, and other Bermuda (re)insurers, underwrite substantial amounts of catastrophe reinsurance around the world:

    1. In the UK, ABIR members and other Bermuda insurers have contributed just under 20% of the costs of the late in the year 2015 flooding.
    2. In Thailand, ABIR members provided an estimated 15% of the costs of the 2011 Thai floods.
    3. In the US, ABIR members, and other Bermuda (re)insurers are estimated to have borne 16% of the losses from Hurricane Sandy, much of this in commercial flood claims.
    4. Here in New Orleans in 2005, ABIR members were estimated to have paid 30% of the claims from Hurricanes Katrina, Rita, and Wilma.
    5. ABIR members will be in the mix for the UK and US reinsurance purchases anticipated by the national flood insurance programs.