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Creating a private flood insurance market critical

November 24, 2018

A new Federal Emergency Management Agency report is shocking: 71 percent of Texas homes in high-risk flood zones are not covered by flood insurance. Another report reveals 31 percent of Texas properties should be listed in high-risk zones — but are not.

Congress’ continued failure to reform an increasingly expensive National Flood Insurance Program, or NFIP, coupled with Houston’s record-setting floods last year and now Hurricane Florence in Florida, has created an urgent need to improve the availability and affordability of flood insurance.

The Texas Legislature, and those in other states, can help address this dangerous situation by encouraging a larger private flood insurance market.

There are only two private insurance companies writing primary flood insurance in Texas, defined as up to $250,000 in coverage. Although 738,000 Texans have NFIP coverage, the FEMA report “An Affordability Framework for the National Flood Insurance Program” found that only residents with higher incomes are buying it, leaving an ever-growing majority of others unprotected. While FEMA studies this, the private market is moving ahead and delivering more affordable flood insurance where it can.

New catastrophe models are allowing insurance companies to better understand risk and thus accurately price flood premiums — down to the individual property — providing greater consumer choice and alternatives to the federal NFIP. When state government encourages it, a vibrant, competitive environment emerges, as it has in Florida where, in just three years, almost 30 companies are offering better coverage at a cheaper price. In Miami-Dade County, ground zero for Hurricane Andrew in 1992, one private insurer’s average premium is $677 compared to the NFIP’s $980 average.

The use of catastrophe models in setting rates isn’t new. But it’s usually used with claims data, something the NFIP hasn’t been willing to share, citing privacy concerns. Also, greater consistency is needed among individual state insurance departments on how catastrophe models may be used in submitting rates.

The National Conference of Insurance Legislators, or NCOIL, has begun reviewing a simple two-page proposed draft law, based on Florida’s, whose concept is “if you build it, they will come.” One Texas legislator is participating in these NCOIL discussions. The draft law permits companies, as an example, to test market rates in order to promote competition and choice, with the regulator approving policy language if a state requires that review (some do not) to ensure policies meet or exceed NFIP coverage.

The model law also ensures that insurance agents educate consumers about the dangers of going without coverage, and that insurance commissioners certify that policies are adequate to meet mortgage banking requirements. The safeguards in this simple model law will absolutely reduce the reliance on federal flood insurance.

Some in the insurance industry are concerned that this proposed regulation is overreaching or unnecessary. It is nonetheless designed to provide suggestions to regulators and those regulated on how to work together to launch or grow a successful market. What isn’t in dispute is private flood coverage’s cost savings, improved benefits and greater consumer choice.

NFIP premiums are rising an average of 8 percent this year, but in some areas the increase is 18 percent — the maximum annual increase allowed under law. So it just makes sense for state legislators and regulators to begin the conversation to fast-track the growth of a private market, which also spreads the risk to private insurers and away from U.S. taxpayers.

Too many Texans are unprotected from the hazards of floodwaters. There’s an urgent need to improve the availability and affordability of flood insurance so more homeowners are able to buy protection for their property and families.

Communities that are fully insured rebuild more quickly and with greater resiliency. While congressional paralysis stymies needed NFIP reforms, we must work toward model private flood insurance legislation to let Washington know “we got this.”

Lisa Miller, a former Florida deputy insurance commissioner, served as an adviser on Florida’s key laws encouraging a private flood insurance market. She is CEO of Lisa Miller & Associates, a Tallahassee, Fla.-based consulting firm.

@LisaMillerAssoc

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