Flood insurance reform bill passes U.S. House, calls for private market risk transfer

by Artemis on December 15, 2011

A new bill, which is ostensibly a tax bill but includes reforms to the National Flood Insurance Program, has been passed in the U.S. House of Representatives (on the 13th), the first step on a long route towards becoming law (or not). The bill passed was called the Middle Class Tax Relief and Job Creation Act, but within it are proposed reforms for the NFIP which have also been passed in the vote.

The interesting thing about this NFIP reform proposal is the inclusion of a section calling for FEMA to have powers to seek to reinsure parts of the NFIP in the private reinsurance markets or through the capital markets.

The flood insurance reform proposals were raised by Congressman Rick Berg who is seeking to provide flood insurance holders with more protection and also to take some of the burden off taxpayers. If finally made law this reform proposal would extend the NFIP by five years and bring new risk transfer mechanisms into play.

The interesting section of the bill (which you can view a copy of here from Out of the Storm News) would authorise FEMA to carry out initiatives to determine the capacity of private insurers, reinsurers and financial markets to assist in managing the financial risks associated with flooding. If enacted there is a twelve month assessment period during which an evaluation would have to be made of the private reinsurance, capital and financial markets to assume a portion of the NFIP’s risk. At the end of the assessment a report would have to be submitted to Congress with recommendations.

The bill would authorise the NFIP’s administrator to go out and secure reinsurance coverage from whatever source most appropriate, be that reinsurance or capital market instruments such as catastrophe bonds. Sufficient coverage would have to be secured to enable the NFIP to maintain their ability to pay claims and to minimise them having to use a borrowing facility. Also, each year a claims paying assessment would have to be undertaken to ensure coverage was sufficient.

Of course, any move towards the private risk transfer markets, while perhaps the only way to ensure sufficient claims paying ability, will also lead to premium increases and burdens elsewhere. As such it is likely to be a long process before a bill such as this becomes law. It will be an interesting process to see whether this bill gets ratified or whether another comes along which also calls for better risk management and risk transfer of the NFIP’s exposures.

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