Is Private Market an Option for Florida Flood Insurance?

With thousands of Florida homeowners facing significant increases in their federal flood insurance premiums, state lawmakers are considering ways to open up the market to private insurers.

Industry experts, however, say there are considerable barriers to creating a private market.

The National Flood Insurance Program has a current deficit of $24 billion, which federal lawmakers looked to solve by enacting the Biggert-Waters Flood Insurance Reform Act of 2012. The reforms include new maps that expand flood zone areas where homeowners must carry coverage. The reforms also phase-in higher rates and eliminate subsidies on homes built before 1974 when the first flood maps were put into place.

More than two million Florida properties are covered through the NFIP, representing 37 percent of the total NFIP market and more than $1 billion in premiums. About 268,000 policies are currently subsidized, including 35 percent of policies in the Tampa Bay region.

Senate Banking and Insurance Committee Chair David Simmons (R-Altamonte Springs) said that given the magnitude of the increases expected with new maps and other reforms, it is time to consider a state-specific private market solution to the problem.

Simmons and other lawmakers complain that in the last three years, Florida has paid in $3.60 in premiums for $1 in claims. That makes Florida, which represents 37 percent of the NFIP market, a “donor” state.

“We pay significantly more in premiums than exists in the way of claims and the question is why are we doing that if it is not the only opportunity to solve the problem,” said Simmons at a recent Senate committee meeting.

Office of Insurance Regulation Deputy Chief of Staff Rebecca Matthews said regulators are talking to several companies about the possibility of marketing flood policies. Matthews said that regulators see no reason Florida could not establish its own flood program. However, she noted, the NFIP reforms and rate hikes are already kicking in.

“We are not sure how quickly it will all move,” said Matthews.

Security First Insurance Co. President Locke Burt said that it is unlikely that any private insurer would come forward without being granted significant leeway in setting rates and drafting forms.

Burt said that the NFIP has only developed national loss experience data and no private insurer would have a database to calculate rates, much less one that would allow regulators to judge if the rates are actuarially sound and conform to state law.

“It is a classic ‘Catch-22,'” said Burt. “Because a private insurer can’t prove the rates, they can’t write it.” Burt also said that insurers would have to have the freedom to develop underwriting guidelines and policies that would incorporate any deductibles or exclusions. Normally, those would have to be approved by regulators with statutory backing.

That kind of uncertainty, he said, could only be overcome by trial and error of the sort insurers don’t like. “If someone came up with a program and started selling it, one of two things would happen,” said Burt. “Either if would be priced too cheap and you’d go broke or the price would be too high and no one would buy it.”

Florida Association of Insurance Agents President Jeff Grady said after the meeting that while the search for answers to rising flood insurance rates is commendable it ignores several basic insurance and political realities.

Even though Florida may be a “donor” state when it comes to the NFIP, if the rates truly reflected Florida’s catastrophe exposure they would more than likely have to increase, Grady said.

“The reason this is a federal government program is they are the only entity capable of spreading the risk,” said Grady.

He said the only way to offset that would be to spread the risk to other policyholders such as making it part of every homeowner’s coverage.

Simmons also floated the idea of running a flood program through the state’s Citizens Property Insurance Corp.

Grady said such ideas would likely set off a political debate similar to previous debates over windstorm rates.

He said using the property insurer Citizens would require homeowners in non-flood areas to in effect subsidize flood rates.

That could be a tough sell since lawmakers in non-coastal areas believe their constituents should not have to subsidize homeowners in coastal areas. There is also the ongoing struggle over reducing subsidies that all state policyholders might have to pay in the event Citizens faces a funding shortfall.

“You would trade one set of problems for even more problems,” said Grady.

Despite the many questions raised, Simmons and other lawmakers said they would not give up their quest to find a private sector solution.

“It seems to me we have to let you guys have the freedom to take a shot,” said Simmons.