WASHINGTON — For more than a half-century, the United States government has been the only big-time player in the flood-insurance market, underwriting the vast majority of home and business policies while largely relegating private insurers to a niche supplemental market.
As lawmakers on Capitol Hill grapple with how to overhaul the federal National Flood Insurance Program, a vocal faction is pushing to open up the market to private competition. More choices could give homeowners cheaper options.
But backers of the NFIP have serious concerns that competitors might poach profitable policies while leaving subsidized or riskier properties in the already debt-mired federal program. That, in turn, could undercut the NFIP, draining it of premium dollars and raising fears that flood claims from the remaining properties will swamp the program’s ability to pay.
In congressional negotiations over an NFIP overhaul, “the major sticking point is the role of the private insurance market,” said Sen. John Kennedy, R-Louisiana, who cautiously backs a partial privatization.
Lawmakers have put off a long-term renewal of the program since its congressional authorization expired in September, instead opting for a series of short-term extensions, the latest of which runs out Jan. 19. Several other NFIP controversies remain unresolved, including how to handle the program's nearly $30 billion debt to the U.S. Treasury, whether to ratchet up premiums for homes that repeatedly flood and how to avoid the kinds of long-running disputes over claims that marred the aftermath of 2012’s Hurricane Sandy in the Northeast.
But disagreements over the role of private insurers is perhaps the deepest disagreement, reflecting competing underlying visions of the NFIP’s purpose, according to several senators involved in negotiations and a number of congressional staffers who spoke to The Advocate on condition of anonymity because they weren’t authorized to speak publicly.
Congress created the National Flood Insurance Program in the 1960s, following a string of costly catastrophes, including 1965’s Hurricane Betsy, which caused more than $1 billion in damage in New Orleans and along the Gulf Coast. Property owners at the time had virtually no way of obtaining flood coverage, as private insurance companies had largely abandoned the market after absorbing crippling losses in the massive 1927 Mississippi River floods.
Yet rates charged by the NFIP haven’t always tracked a property’s risk of damage. Provisions in the NFIP allow a sizable minority of policyholders to pay reduced premiums.
Homes that predate the NFIP but met building codes at the time of construction are charged less. Properties are also “grandfathered” whenever the Federal Emergency Management Agency updates its flood maps, leaving premiums low for policyholders even if FEMA determines the property’s risk of flooding has risen.
At least in theory, those below-market rates are offset by other properties being charged rates higher than the risk of flooding would dictate, including owners of beachfront vacation homes, whose secondary properties are assessed higher premiums. Many watchers of the program suspect private insurers would poach — or “cherry-pick” — these lucrative properties if the market is opened up.
“I’m delighted to have private insurance participation,” Kennedy said, “but I’m not going to agree to allow it if it would undermine the program.”
Regulatory hurdles have limited the ability of private insurers to compete for clients head to head with the NFIP. Federal law requires virtually all mortgages on homes in high-risk flood areas to carry flood coverage, and the wording of current regulations has left many banks reluctant to recognize non-NFIP policies.
Homeowners who leave the NFIP also give up their “grandfathered” status, meaning they’d likely be charged significantly higher rates if they later return to the federal program. That's served as a major incentive to keep coverage with the NFIP, even if private insurers offer lower premiums.
A 2017 study by Milliman Inc., a global consultancy, and the risk-modeling firm KatRisk estimated that 69 percent of single-family homes across all flood zones could buy cheaper flood coverage from private insurers. For 42 percent of homes, the study found, premiums could cost less than one-fifth of their current NFIP rates.
But the study also included a flip side: For 21 percent of Louisiana homes, premiums on the private market would be more than double the cost through the NFIP.
If only those 21 percent of Louisiana homeowners chose to stay in the NFIP, it's extremely unlikely their premium dollars could cover their claims. That raises serious concerns for defenders of a program already under attack as fiscally unsustainable.
Private flood insurance would reduce premiums for 69 percent of single-family homes in Louisiana, with 42 percent of homeowners paying less th…
“We keep talking about the private market," said Rep. Cedric Richmond, D-New Orleans, a critic of the concept, during debate in November over a House bill that included some private-market provisions. "They’re going to pick and choose where they want to insure — and then all of a sudden you’re left with a high-risk pool where homeowners who work every day are stuck with costs they just can’t afford.”
Private "insurers cannot be allowed to cherry-pick the good policies and leave only the riskier ones — like many in Louisiana — for the NFIP," said U.S. Rep. Ralph Abraham, R-Alto. "That threatens the solvency of the program, which in turn threatens the security of the policyholders."
A major way private insurers might compete is by pricing individual homes instead of relying on the broad risk categories marked on the FEMA flood maps the federal program uses to set its rates. The NFIP's approach lumps together large swathes of communities into risk categories, said Kelley Pace, a professor of finance at Louisiana State University, and overlooks potentially significant variations in risk within each zone.
The private sector "has the incentive to undercut the NFIP on those properties that the NFIP has overpriced," Pace said, and could target homes that are less risky than their current premiums would suggest.
The NIFP "would have a smaller portfolio and one that is, essentially, less profitable," said Pace, who directs LSU's Real Estate Research Institute. The NFIP in turn would be forced to either jack up rates on its remaining policyholders — those who've enjoyed below-market premiums for years — or else force federal taxpayers to cover regular losses.
Ned Dolese, the president and co-founder of Coastal American Insurance Co., is among a handful of private insurers currently offering flood-insurance coverage.
Dolese, whose firm writes policies in Mississippi and Alabama, said a top selling point of Coastal American flood coverage is that it's wrapped up in their broader package of homeowner's insurance. That means it'll cover home values above the NFIP's $250,000 cap on coverage — and that covered homeowners won't have to battle with adjusters over whether hurricane damage was caused by wind or water because both are covered under the same policy and same company.
Since launching flood insurance coverage less than two years ago, Dolese said, about 65 percent of the policies he's sold have gone to homeowners outside flood plains who've never had flood insurance before.
That figure, Dolese said, is a strong indication that private insurers could expand flood coverage to the vast majority of American homeowners that currently don't carry any — without necessarily undermining the NFIP.
But private insurance could also offer much better rates to some current NFIP customers if Congress dropped the loss-of-grandfathering provisions that keep many homeowners from shopping in the private market, Dolese said.
Free-market competition could prod the NFIP to become more nimble in how it prices properties — varying rates within a flood zone, for example, and dropping rules that charge higher rates on second homes — to keep homeowners from buying policies elsewhere, Dolese said.
"If not, I guarantee you cherry-picking is going to happen and all they’ll be left with is the people that can’t go anywhere else," Dolese said. "That’s capitalism."
But serious political and social fallout from potentially moving flood insurance premiums toward market rates make lawmakers, especially from storm-prone regions like Louisiana, cautious. Rising insurance premiums erode a home's value — and rapid hikes could leave those still paying down a mortgage owing more to the bank than the home is worth.
The Biggert-Waters Flood Insurance Reform Act of 2012, for example, sought to unwind some of the subsidies for high-risk homes and properties that had flooded multiple times. Sticker-shock for homeowners whose rates would've risen dramatically sparked outrage and led Congress to roll back many of the Biggert-Waters reforms before they went into effect.
Environmental groups, however, have long argued that subsidized NFIP rates have encouraged people to build (and rebuild) homes in unsustainable locations — including in wetlands and increasingly vulnerable areas of Louisiana's coast — by shielding residents from the true costs of living there.
Those subsidies, conservative critics of the program contend, also increase the cost of future disasters by making it easier for people to keep living in risky areas and to rebuild after storms instead of moving to safer locations.
But Rep. Garret Graves, R-Baton Rouge, and other lawmakers argue back that south Louisiana homeowners aren't themselves responsible for their rising risks. Graves lays much of the blame for the state's sinking coastline on the U.S. Army Corps of Engineers' levee policies while noting that new development in states further up the Mississippi River contributes to downstream flooding.
Jacking up flood-insurance premiums to reflect that risk, however, would come out of the pocket of coastal homeowners.
And undermining the NFIP, its defenders note, could also endanger other critical functions of the federally run program. Flood maps produced on the program's dime provide towns and parishes with insight into risks and help guide development. Communitywide incentives built into the program also push local governments to cut down on their flood risk, such as by adopting stricter building codes or limiting construction in wetlands.
The federal program has also built up decades of data on local floods and past claims that would be invaluable to private insurers looking to calculate risk. Simply allowing private insurers to benefit from those programs and tap the NFIP's data without picking up part of the tab, Graves said, would unfairly lower private rates compared to NFIP policies and leave communities more vulnerable.
"The NFIP (...) is a complex entity," Pace said. "There's a pure insurance component but there's also an information component — the flood maps — and the various community programs. You can't just treat it like it's entirely an insurance program."
Current flood maps are flawed, imperfect and in some cases outdated, acknowledged Graves, Pace and others. That's made investing in better maps a top priority for Louisiana's delegation in the pending flood-insurance overhaul.
A proposal authored by Sen. Bill Cassidy, R-Louisiana, along with New York Democratic Sen. Kirsten Gillibrand, would impose surcharges on private flood insurance policies. Cassidy said those fees, along with other "guardrails" for the private market included in his bill, could give homeowners a choice in coverage while protecting the NFIP against "cherry-picking."
Sen. Sherrod Brown of Ohio, the top Democrat on the Senate committee which oversees the NFIP, wouldn't rule out supporting a bill with limited private-market provisions. But Brown said he'd need to be convinced it wouldn't suck away money from mapping efforts.
"If we do privatization the way (some advocates) want, it means there aren’t the dollars we need to do mapping, and without the sophisticated mapping we need, flood insurance doesn’t work," Brown said.
"I’m just not going to say ‘absolutely no’ on privatization — but I know what privatization almost always brings," Brown said. "If they can convince me it doesn’t, I’m open."