NAMIC suggests catastrophe bonds for National Flood Insurance Program

by Artemis on November 21, 2014

In a testimony delivered to the United States House of Representatives, NAMIC suggested that the U.S. National Flood Insurance Program would benefit from transferring risk to the private sector through reinsurance and catastrophe bonds.

The National Association of Mutual Insurance Companies delivered a statement as testimony at a hearing on “Opportunities for a Private and Competitive Flood Insurance Marketplace” held by the United States House of Representatives Financial Services Subcommittee on Housing and Insurance on the 19th November.

The statement laid out a number of the issues that NAMIC members feel are in need of restructuring at the National Flood Insurance Program (NFIP), such as moving towards risk based actuarial pricing for flood insurance and the use of private reinsurance and capital markets for transferring a portion of the NFIP’s risks.

NAMIC believes that in order for the NFIP to continue to function it must begin to charge actuarially sound insurance rates to customers. It also believes that subsidies, to make the increase in rates that would happen if they were risk based, should be transparent and not hidden in the insurance products themselves anymore.

NAMIC believes that the NFIP has to exist, due to the difficulties in creating a private market in residential flood insurance currently, but that it needs reform to be able to survive and function effectively.

One key reform needs to be around allowing the private sector to play a risk bearing role, essentially to provide reinsurance capacity, for the NFIP. These ideas should be given consideration and may have merit, NAMIC says.

“Ceding a portion of the NFIP’s risk to the private sector through reinsurance and catastrophe bonds could reduce taxpayer exposure to future debt,” NAMIC explains.

This issue has been raised in a number of recent legislative bills on the flood insurance problem in the U.S., but nothing has yet succeeded in getting through the various levels of government that would cause the NFIP to cede more risk to the reinsurance and capital markets.

The thinking is that by allowing the NFIP to transfer certain risks to the private market, it can itself be better protected and insulated from the need to put any burden on taxpayers as a result of the government’s need to raise funding to pay for major flood losses.

The traditional and non-traditional reinsurance markets would certainly have an appetite to provide risk bearing capacity to the NFIP. A similar process is underway in the UK with Flood Re, which will look to the private markets (including alternative capital) for flood retrocessional reinsurance capacity. The capital markets and insurance-linked securities (ILS) funds would no doubt be keen to play a role, whether in a catastrophe bond form or purely by collateralized traditional reinsurance contracts.

This is an issue that is expected to continue to become increasingly political, meaning that change is likely for the NFIP. However whether that results in risk transfer to the capital markets remains to be seen.

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