A demand by a House Financial Services subcommittee chairman that bank regulators move quickly to facilitate sale of private flood insurance as an alternative to the National Flood Insurance Program is prompting a split in the insurance industry.
The letter by Rep. Randy Neugebauer, R-Texas, said that the provision’s intent “is to reaffirm and support pre-existing requirements that lenders accept comparable private flood insurance policies.”
He said that, “I believe that once fully implemented, this provision will further encourage private-sector participation in the flood insurance market and reduce the risk to which the U.S. taxpayer is currently exposed.
“The agencies’ timeline to delay implementation for a possible two years after enactment imposes additional and unnecessary risk on the NFIP, and ultimately the U.S. taxpayer.”
In his letter, Neugebauer said that prompt implementation of the private insurance provision is one of my highest priorities,” said Neugebauer Wednesday in a letter sent to federal banking regulators.
Neugebauer replaced Rep. Judy Biggert, R-Ill., as chairman of the Housing and Insurance Subcommittee of the House Financial Services 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 Farm Credit Administration.
Specifically, Neugebauer is requesting “a more formal and regular update of any interagency actions” needed to develop regulations needed to require lenders to accept private flood insurance.
He wants these rules in place before the July 2014 anticipated target date for the rule, Neugebauer said.
He sent the letter as a followup to an April 17 meeting of House staffers with OCC representatives. The OCC charters national banks
Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies, said NAMIC was a strong supporter of the provision, which recognizes that private flood insurance carriers can satisfy the mandatory purchase requirement for those who buy homes whose mortgages are federally insured.
“Allowing those insurers who want to offer flood insurance outside of the NFIP to do so will help to reduce the exposure of the NFIP, the federal government, and ultimately the taxpayers, to flood risk. Like Neugebauer, we encourage action on this issue as swiftly as possible,” Grande said.
However, in a letter last June as Congress debated the NFIP reauthorization legislation in which the provision is included, the president of the company that handles most of the back office work for write-your-own insurance companies urged caution.
Stephen Harty, president of National Flood Services in Kalispell, Mont., said in his letters to Senate negotiators dealing with the reauthorization legislation that privatization proposals for the NFIP be delayed until the full impact of these on the NFIP could be studied.
He also voiced concerns it would pull from the NFIP flood insurance customers in areas unlikely to flood, thereby raising the cost of NFIP coverage to the people who can least afford it.
And, Harty said, “It is not clear that private insurers have, or would be willing to allocate, sufficient underwriting capacity” for private flood insurance.”
Harty said that private insurers will require higher premiums than do current NFIP policies because of different loss ratio tolerances, additional overhead expenses chargeable to the program; and profit expectations.
“The result will be higher prices for homeowners and small businesses,” Harty said in the letter.
“The problem here is that the policyholder receives no benefit whatsoever for a higher price: the premium difference between a reinsured policy and current NFIP rates would be entirely absorbed by the reinsurer’s profit, expense and loss-ratio expectations.”
An insurance industry official said that, currently, only a few insurers write flood insurance coverage. These are mainly the insurers of high-end residential properties, such as Chubb and Lloyd’s of London.
In his letter, Neugebauer said the provision was “an essential reform” to the legislation, which was enacted last July. It reauthorized the NFIP for five years and imposed certain reforms aimed 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 in 2005 and Sandy last fall.
David Barr, a spokesman for the FDIC, the federal regulator of state-chartered banks, said it would not have any comment on the letter because, “We have not yet responded to the congressman.”
“I request that your agencies issues a letter of instruction containing interim guidance to lenders stipulating that the blanket rejection of private flood insurance is unlawful and must be discontinued immediately,” Neugebauer said in his letter.