A demand by a House Financial Services subcommittee chairmanthat bank regulators move quickly to facilitate sale of privateflood insurance as an alternative to the National Flood InsuranceProgram is prompting a split in the insurance industry.

The letter by Rep. Randy Neugebauer, R-Texas, said that theprovision's intent “is to reaffirm and support pre-existingrequirements that lenders accept comparable private flood insurancepolicies.”

He said that, “I believe that once fully implemented, thisprovision will further encourage private-sector participation inthe flood insurance market and reduce the risk to which the U.S.taxpayer is currently exposed.

“The agencies' timeline to delay implementation for a possibletwo years after enactment imposes additional and unnecessary riskon the NFIP, and ultimately the U.S. taxpayer.”

In his letter, Neugebauer said that prompt implementation of theprivate insurance provision is one of my highest priorities,” saidNeugebauer Wednesday in a letter sent to federal bankingregulators.

Neugebauer replaced Rep. Judy Biggert, R-Ill., as chairman ofthe Housing and Insurance Subcommittee of the House FinancialServices Committee in this Congress.

The letter was sent to the heads of the Federal Reserve System,the FDIC, the Comptroller of the Currency, the NCUA and the FarmCredit Administration.

Specifically, Neugebauer is requesting “a more formal andregular update of any interagency actions” needed to developregulations needed to require lenders to accept private floodinsurance.

He wants these rules in place before the July 2014 anticipatedtarget date for the rule, Neugebauer said.

He sent the letter as a followup to an April 17 meeting of Housestaffers with OCC representatives. The OCC charters nationalbanks

Jimi Grande, senior vice president of federal and politicalaffairs for the National Association of Mutual Insurance Companies,said NAMIC was a strong supporter of the provision, whichrecognizes that private flood insurance carriers can satisfy themandatory purchase requirement for those who buy homes whosemortgages are federally insured.

“Allowing those insurers who want to offer flood insuranceoutside of the NFIP to do so will help to reduce the exposure ofthe NFIP, the federal government, and ultimately the taxpayers, toflood risk. Like Neugebauer, we encourage action on thisissue as swiftly as possible,” Grande said.

However, in a letter last June as Congress debated the NFIPreauthorization legislation in which the provision is included, thepresident of the company that handles most of the back office workfor write-your-own insurance companies urged caution.

Stephen Harty, president of National Flood Services inKalispell, Mont., said in his letters to Senate negotiators dealingwith the reauthorization legislation that privatization proposalsfor the NFIP be delayed until the full impact of these on the NFIPcould be studied.

He also voiced concerns it would pull from the NFIP floodinsurance customers in areas unlikely to flood, thereby raising thecost of NFIP coverage to the people who can least affordit.

And, Harty said, “It is not clear that private insurers have, orwould be willing to allocate, sufficient underwriting capacity” forprivate flood insurance.”

Harty said that private insurers will require higher premiumsthan do current NFIP policies because of different loss ratiotolerances, additional overhead expenses chargeable to the program;and profit expectations.

“The result will be higher prices for homeowners and smallbusinesses,” Harty said in the letter.

“The problem here is that the policyholder receives no benefitwhatsoever for a higher price: the premium difference between areinsured policy and current NFIP rates would be entirely absorbedby the reinsurer's profit, expense and loss-ratioexpectations.”

An insurance industry official said that, currently, only a fewinsurers write flood insurance coverage. These are mainly theinsurers of high-end residential properties, such as Chubb andLloyd's of London.

In his letter, Neugebauer said the provision was “an essentialreform” to the legislation, which was enacted last July. Itreauthorized the NFIP for five years and imposed certain reformsaimed at making the program self-sufficient.

Currently, the NFIP owes the Treasury almost $30 billion,primarily because of the costs of hurricanes Katrina and Rita in2005 and Sandy last fall.

David Barr, a spokesman for the FDIC, the federal regulator ofstate-chartered banks, said it would not have any comment on theletter because, “We have not yet responded to the congressman.”

“I request that your agencies issues a letter ofinstruction containing interim guidance to lenders stipulating thatthe blanket rejection of private flood insurance is unlawful andmust be discontinued immediately,” Neugebauer said in hisletter.