After an extremely destructive and challenging hurricane season, Americans who were affected are working to recover and rebuild. Assisting them now is critical, but this hurricane season has been a deadly reminder that we must do more to prepare for future flood disasters. We need a long-term solution that strengthens and stabilizes the National Flood Insurance Program (NFIP) and reduces the costs borne by American taxpayers.
Continuing to allow the Federal Emergency Management Agency (FEMA) to more properly manage its risk with the assistance of the private reinsurance and insurance-linked securities markets can accomplish this goal.
The federally-backed NFIP was created more than half a century ago to ensure at-risk property owners would have access to affordable flood insurance coverage. At the time, most experts viewed these property owners as uninsurable. Thanks to technological advances, private insurers now have the ability to more accurately predict and price flood risk. But the private flood insurance market has been sidelined by antiquated and preferential rules, leaving those required to purchase flood insurance with little to no choice in their coverage options and a mandate to pay for what is often an insufficient and outdated policy.
We each have different ideas about what kind of NFIP reforms Congress should pursue, but as our colleagues in the U.S. House of Representatives and Senate continue to discuss NFIP reform, one key issue we agree on is the need to spread out the risk to capital markets through insurance linked securities—also known as catastrophe bonds—and private reinsurance. Transferring risk to the capital markets will help protect American taxpayers and NFIP policyholders from future losses.
Catastrophic bonds and reinsurance can support and stabilize the NFIP, help it manage the risk of losses to the program, and ultimately reduce the cost of flood losses to taxpayers. Private risk-transfer is an important tool that can increase the NFIP’s financial certainty and stability. A capital market backstop would not only protect taxpayers and property owners, but would also allow the NFIP to pursue continuous improvement in services and products. It has the potential to mitigate the severe disruptions to FEMA’s annual budget plans that arise from catastrophic flood losses.
Certain state governments and countries around the world, including California, Florida, Texas, the United Kingdom, New Zealand, and the Philippines, already heavily rely on the capital markets to manage their state or nationally-backed disaster risk programs and pools. Together these states and countries have secured tens of billions of dollars of natural disaster risk coverage from the private markets over the past decade, ensuring the integrity of their programs and enabling them to pay claims and assist affected households in an orderly manner when disaster strikes.
Leveraging more reinsurance or directly issuing insurance-linked securities will allow the federal government to do the same. In January 2017, FEMA secured a billion-dollar reinsurance policy for the NFIP—the first time the federal government purchased reinsurance for any risk or peril. This prescient action resulted in significant taxpayer savings in the flood loss following Hurricane Harvey.
Capital markets have demonstrated the capacity and willingness to underwrite flood insurance risk. To modernize its risk transfer options, FEMA must have the tools and flexibility necessary to consider all forms of risk transfer, including traditional reinsurance, catastrophe bonds, collateralized reinsurance, resilience bonds and other insurance-linked securities. This will maximize pricing competition and help secure the best value for the NFIP and taxpayers.
All options that protect taxpayers and policyholders should be open for discussion. We stand ready to work with our colleagues in Congress to foster a smarter, safer, and more effective flood insurance marketplace.
