National Flood Insurance Program needs private sector reinsurance participation

by Artemis on July 5, 2011

Frank Nutter, President of the Reinsurance Association of America, has published an opinion piece on the Washington focused website theHill.com. In it he calls again for the National Flood Insurance Program to be reformed and allow the private sector to become the reinsurer and ultimate backstop for the program leaving the taxpayers unburdened.

He also highlights a number of problems with the scheme as it is today, many of which would be helped by greater private reinsurance market participation. He argues that the NFIP’s ability to provide flood insurance at all is in jeopardy, adding that the growing debt burden ($18 billion and rising) increases the government’s debt burden and puts taxpayers at risk. He also notes that the techniques for assessing flood risk do not reflect the best data and information available on flood risk, which could be putting people at risk or over charging them.

Putting the private sector in charge of setting rates and managing the NFIP’s reinsurance would at least give the program a chance at survival and begin the process of fixing its operational issues.

It’s interesting to see Mr. Nutter step forwards again and essentially call for the private reinsurance market to step in and assist the NFIP. Last year he voiced his concerns and suggested the private market may be the way to go to improve the existing program, we wrote about his call to privatise flood insurance here.

If the private reinsurance market gets involved in the NFIP we could see a rapid improvement in flood risk measurement and modelling which could in turn lead to more interesting and alternative ways to create flood insurance and flood risk transfer products. We’ve written before about the potential for flood catastrophe bonds in the future, at the moment it feels like the NFIP with all its issues may be hindering instruments like that from becoming a reality.

With U.S. government finances being cut right now this may be an opportune moment for Mr. Nutter to have renewed his calls for privatisation of the flood insurance program. The government is likely to look favorably on any suggestions which allow them to shift some of the burden from themselves and taxpayers to the private reinsurance market and that shift could open up a world of opportunities for risk transfer.

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