European reinsurers will benefit if NFIP buys more cover

The US National Flood Insurance Program’s (NFIP’s) reinsurance purchase in 2017, in which many European reinsurers participated, represented a good deal for the US government and it should look to purchase more limit in 2018.

This is the view of Thomas Dawson, partner at law firm Drinker Biddle, speaking to Baden-Baden Today. The opening up of the US flood market represents a potential growth opportunity for global reinsurers including some of the big European players and Lloyd’s syndicates.

The NFIP placed its first significant reinsurance programme in January 2017, ceding $1.04 billion of coverage to a group of 25 private reinsurers and Lloyd’s syndicates in an effort to reduce the accumulation of future debt to the Treasury.

The NFIP is now over $30 billion in debt to US taxpayers, and it may need an additional $16 billion to cover claims from recent storms, particularly Hurricane Harvey.

The reinsurers that provided the NFIP with flood reinsurance protection are expected to suffer a total loss given the magnitude of Harvey-caused flooding.

The political will to allow for more inclusion of the private insurance sector in flood risk seems to be growing in Washington DC, Dawson said.

The US Congress has extended the deadline to reauthorise the NFIP. The programme’s original deadline of September 30 was pushed back to December 8.

As part of a reform, Congress should change the NFIP’s structure, Dawson suggested. Low rates, while politically palatable, are indefensible from an actuarial perspective, and need to be increased over time, he said.

Accurate, regularly updated flood maps need to be created using up-to-date mapping technology. In addition, structures subject to repeated flooding need to be excluded from the NFIP, and federal/state governments ought to collaborate to create buyout funds to compensate owners.

Only primary residences and small businesses—with an annual turnover of less than $1 million—ought to be eligible for the NFIP, Dawson said. Expensive second or third homes and larger businesses should be excluded. Finally, private market insurers should be allowed to provide coverage for an increased number of structures.

But reform of the NFIP is just “one piece of a larger, complex puzzle,” Dawson said.

With take-up rates for flood and earthquake coverage below 20 percent, and in some locales well below that, the challenge is persuading (as opposed to commanding) American property owners—residential, commercial, and government—to insure against cat events, Dawson said.

This could be achieved via education initiatives, by requiring insurers/insurance brokers to offer cat event coverage options and finally, through tax incentives to purchase appropriate cat coverage, Dawson suggested.

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