Coalition urges lawmakers to consider catastrophe bonds in flood insurance reform

We’ve written before suggesting that it may be time for the U.S. government to seek assistance from the private reinsurance and catastrophe bond markets with the significant burden of flooding risk that they assume through the National Flood Insurance Program. It’s thought that the NFIP wouldn’t be able to cope with a major flood catastrophe and as a result they should allow the private market to step in and provide cover for those peak flooding perils.

A new coalition called SmarterSafer.org, formed of environmental, consumer and housing organisations alongside insurers and insurance related associations, are calling for the U.S. government to encourage private market intervention in the flood insurance market. The coalition believes that the subsidised and taxpayer funded nature of the NFIP is unsustainable and will only result in a greater burden on the taxpayers if a major flooding event occurred. The coalition supports reform of the NFIP and a move to proper risk-based insurance rates and pricing, rather than the currently subsidised rate policy.

The coalition have written to the Joint Select Committee on Deficit Reduction (download the letter here), who are responsible for austerity measures and reducing government spending, suggesting that reforming the NFIP and allowing private reinsurance and capital market involvement will help them achieve their goals of deficit reduction. The NFIP is currently $18 billion in debt.

One of the items being called for is for FEMA to examine the ability of the private sector to assist the program through reinsurance or catastrophe bonds. Of course, there will inevitably be some backlash against rising homeowner rates, which would be necessary in some areas to accurately price the risk, but this may be the only way that the NFIP can be sustained into the future.