The National Flood Insurance Program (NFIP), implemented in 1968 to address a market failure in the flood insurance sector, has been the subject of scrutiny following hurricanes Harvey and Irma. Increasing the scope of the private sector has often been cited as a potential solution to the NFIP’s pitfalls. However, there are challenges private companies must address for this to be a viable solution.
In Florida, 16 private insurance companies provide coverage for flooding, often at more competitive rates compared with the NFIP in lower-risk flood areas. Increasing private sector presence in these areas may benefit consumers by providing them with competitive pricing and different coverage options to choose from.
Private insurers must be capable of covering severe losses at the level the NFIP currently does, either by holding a large sum of capital in reserve or through reinsurance. Reinsurance, the “insurance for insurers,” allows private companies to take on more risk by assuming some of their costs in the event of a large-scale natural disaster. An expansion of the reinsurance market for flood insurance is necessary in resolving this issue.
The challenge of covering severe losses isn’t exclusive to the private market. Without loans from the US Treasury, the NFIP would not have been capable of covering the amount of damage incurred during Hurricane Katrina. The Government Accountability Office argues that it is unlikely the NFIP will be able to pay off its debt. A prerequisite to privatizing the flood insurance sector is forgiving the program’s accumulated debt.
Private insurers often complain that in order to accurately assess pricing for areas that are more prone to flooding, they must be able to access the NFIP’s flood map data. Unfortunately, sharing this information is unlawful due to federal privacy statutes. The declassification of NFIP flood map data is crucial to the success of the private sector.
Researchers Carolyn Kousky and Howard Kunreuther state that another issue with transferring public insurance policies to the private sector is that property owners in high-risk flood areas will experience sharp increases in insurance premiums.This is because private insurers price policies to account for risk, rather than offer artificially lower rates. Vouchers can assist lower-income families seeking affordable insurance in the private market.
Depopulation, as seen in the case of Citizens Property Insurance, can be a vehicle to scaling back the NFIP. Depopulation refers to transferring a significant number of insurance policies to the private market. The Citizens Property Insurance Corporation was created by the State of Florida in 2002 to provide property insurance to those unable to afford policies from the private sector. It quickly became the most popular insurer in the state, in its height covering 1.5 million policies. Depopulation allowed Citizens Insurance to gradually reduce the number of insurance policies they covered to the private market.
Privatizing the flood insurance industry could offer many benefits to consumers, including expanded choice and lower premiums for some. Although privatization is a promising solution, problems such as gaining access to flood maps and covering severe losses without government aid must first be resolved.