Tomorrow, the House Financial Services Committee is expected to vote on a bipartisan proposal that would end the federal government’s monopoly on flood insurance by expanding private insurance options.
The Flood Insurance Market Parity and Modernization Act (H.R. 2901), sponsored by Reps. Dennis Ross (R-FL) and Patrick Murphy (D-FL), clarifies federal regulations to make clear that insurance is treated the same as federal flood insurance for mandatory purchase requirements. This will allow competition in the flood insurance market, providing an alternative for the five million-plus Americans who rely on the National Flood Insurance Program (NFIP), which is $23 billion in debt.
SmarterSafer – a national coalition of taxpayer advocates, environmental groups, insurance interests, housing organizations and mitigation advocates – last week urged the committee to pass this bill which is supported by more than 20 lawmakers. The coalition’s policy recommendations to reform the NFIP can be found here.
Since 1968, the NFIP has provided coverage for floods stemming from storms, hurricanes, and other flood-related events.The federal government has long offered subsidized, below-market rates that discourage competition. At the same time, regulatory barriers prevent private insurers from satisfying flood insurance mandates (the requirement that federally backed mortgages in flood hazard areas cover flood insurance). As a result, most coverage is written by NFIP with a limited role for private insurers; private companies now mostly provide coverage for commercial properties, and coverage above the maximum $350,000 policies allowed by the NFIP.
In contrast to the federal program, private flood insurers can react more quickly to changes in climate conditions or flooding patterns, resulting in rates that are more accurately priced and convey the full risk confronting a home or business owner.
This legislation clarifies that private insurance can meet mandatory purchase requirements for federally backed mortgages and stimulate competition in the market. If private insurers can offer flood coverage, consumers for the first time would be able to price shop among various policies, and could potentially choose different coverage including higher coverage limits, varying deductibles, and greater insurance protection.
A study by the Wharton School showed that the introduction of private insurance providers would reduce rates for some policyholders. In addition to lower rates, private insurers introduce new methods of calculating risks, lower administration costs, and innovative ways to account for mitigation to benefit homeowners and potentially relieve the NFIP of high-risk policies.
Current Status of Private Coverage:
While private insurance providers can offer coverage, many have been waiting for bank regulators to promulgate the rules needed for banks to consider the policies on par with NFIP policies for those required to purchase flood insurance. The Flood Insurance Market Parity and Modernization Act would clarify that private coverage satisfies the requirement for purchasing flood insurance under federally backed home mortgages.