By Bradley Kading After years of trying and failing to reform the long-broken National Flood Insurance Program, perhaps the simplest solution is to inject old-fashioned competition into the marketplace. By allowing private insurers to break the government’s flood insurance monopoly, consumers would have something they have not had in some time: choice.
It is no secret the NFIP has long been plagued by serious problems. In recent years, the program has struggled to pay out claims, failed to accurately price risk and improperly mapped flood zones. On top of that, taxpayers are on the hook for the NFIP’s massive $23 billion debt, which continues to balloon with each major flooding event. Despite this, efforts to get flood insurance on track in a way that would benefit consumers and taxpayers have not advanced.
While the Federal Emergency Management Agency and Congress wrestle with how to fix the program, the free market could play an important role in solving these issues. A environment allowing for more private flood insurance alternatives to NFIP insurance would result in lower rates for some consumers and the potential to remove riskier properties from the NFIP’s rolls, which could alleviate some of the program’s massive debt burden.
All of this can be accomplished with no risk to property owners or — but only if Congress cuts the red tape preventing private insurers from competing with the NFIP.
Recently proposed legislation in Congress aims to do exactly that. The bipartisan Flood Insurance Market Parity and Modernization Act would knock down regulatory barriers to private insurers and spark new competition in the flood insurance marketplace, giving consumers the freedom to choose from a variety of private options that could offer better rates than the NFIP.
To understand why this reform is so crucial, it is helpful to appreciate how we have found ourselves in this mess. Unlike other insurance markets such as health, life and auto insurance, the federal government dominates the flood insurance market. Since 1968, the NFIP has been the primary provider of coverage for floods stemming from storms, hurricanes and other catastrophes.
The NFIP’s taxpayer-subsidized, below-market rates to customers in risk-prone areas have made it virtually impossible for private insurers to compete in the market on a large scale. In other words, the government owns a monopoly on flood insurance.
The new legislation aims to break this government stranglehold by allowing private insurance carriers to satisfy mandates in situations that require property owners to carry NFIP insurance. This would create a system in which private insurers can finally compete with the government and give consumers more options beyond NFIP insurance — consumers could get better rates or better products, with higher coverage limits, varying deductibles, and better incentives for mitigation .
We are already seeing this benefiting consumers in flood-prone states that have acted on their own to stimulate competition. In Florida, for example, some consumers are seeing substantially lower rates thanks to recent legislation allowing for private flood insurance options. And while this state-level legislation is important, we need federal action to empower all consumers with the freedom to choose from more insurance options.
Property owners in the nation’s most flood-prone areas deserve better than a failing government-run system, and taxpayers should not be forced to bear the burden of the NFIP’s mounting debt. And with the NFIP facing an uncertain future, it is more urgent than ever to give consumers more choices.
The Flood Insurance Market Parity and Modernization Act offers common-sense solutions that will give consumers the power to choose from more insurance options while easing the burden on taxpayers. It is time for Congress to take an important step toward real flood insurance reform and pass this much-needed legislation.
Bradley Kading is president and executive director of the Association of Bermuda Insurers and Reinsurers.