Of wind and floods

Is there a place for windstorm coverage in the National Flood Insurance Program? Not according to three major trade groups representing insurance companies — they have officially taken a stand against proposals to add windstorm coverage to the NFIP. The American Insurance Association (AIA), which commissioned a study of the effect of the inclusion of windstorm insurance to the NFIP, the Property Casualty Insurers Association of America (PCI) and National Association of Mutual Insurance Companies (NAMIC) recently advised federal lawmakers that adding windstorm to the national flood program would drive up its already significant deficits.

According to the study commissioned by the AIA, adding windstorm coverage to the NFIP as proposed by H.R. 920, the “Multiple Peril Insurance Act of 2007,” could increase deficits for the NFIP by as much as $100 to $200 billion per year. The study was conducted by the actuarial firm Towers Perrin.

In a letter to U.S. Rep. Gene Taylor (D-MS), AIA President Marc Racicot suggested that “deficits are likely to be even higher than those specified in the analysis due to expected new coastal construction and inflation, and if the program attracts a disproportionate number of high-risk policyholders — as is often the case with government insurance programs — notwithstanding the legislation’s directive that premiums be based on ‘actuarial principles.'”

In a hearing before the House Financial Services Subcommittee on Housing and Community Development, Ted Majewski, senior vice president of Pennsylvania-based Harleysville Insurance Group, who represented PCI, AIA and NAMIC, expressed concerns about the possibility of the bill being added to H.R. 1682, the National Flood Insurance Reform and Modernization Act of 2007, or any other bill.

In addition to dramatically increasing the NFIP’s exposure to catastrophic losses, Majewski noted that the policyholders most likely to buy new federal wind coverage would live in areas that are highly exposed to wind damage, thereby creating an “adverse selection.” Without the ability to spread wind damage risk the program would face the possibility that it would not be self-sustaining, Majewski said. He also noted that the NFIP is already more than $17.5 billion in debt and facing interest costs of more than $900 million a year.

Whether or not H.R. 920 is successfully passed, it’s becoming increasingly clear that the federal government is taking notice of the problems certain areas of the country face with regard to windstorm insurance. The problem is one that has the potential to affect all U.S. taxpayers and property insurance policyholders, as locations without direct exposure to severe windstorms could end up helping to foot the bill indirectly through premium and tax increases.

With that in mind it’s a good idea for all taxpayers and/or policyholders, that is to say, all of us, to pay attention to what our federal and state lawmakers are up to with regards to action — or lack of it — on the problem of windstorm insurance.