The National Flood Insurance Program (NFIP) is charting a course towards reform with a new captain at the helm.
This year marks the 50th anniversary of the formation of the National Flood Insurance Program, and the government-backed platform is set to be overhauled under the leadership of newly installed director David Maurstad.
The NFIP's origin lies in the aftermath of Hurricane Betsy back in 1965, and while the scheme has witnessed various overhauls in the past, it is now set to embark on another period of change.
Maurstad, who took over as director of the embattled program in April of this year, has already overseen the NFIP’s first foray into the capital markets with the placement of $500m in reinsurance coverage in the form of a catastrophe bond.
But that is not the only change that Maurstad envisions for the program which was only just recently renewed for another four months by Congress, albeit with little to no material changes to how it is run.
If the program is not fundamentally reformed, it will continue to accumulate debt at an unsustainable rate, warns Maurstad.
“There isn’t any operation that can support a debt program that exceeds its ability to economically, efficiently and effectively use the funds that have to go towards interest payments," the NFIP's director said on a call discussing the scheme's 50th anniversary.
In a sign of its indebtedness, Maurstad pointed to the circa $4bn of interest payments the NFIP has paid out over the last 10 years.
“We’ve paid about $4bn in interest payments over the course of the last decade, and those dollars could, from my perspective, be put to good use either in mitigation or to provide protection for the taxpayers through more private reinsurance," he said.
The NFIP took the first step in tapping the commercial reinsurance market for coverage back in September 2016 when it secured a $1m test purchase. That trial proved successful and the NFIP then went to buy $1.042bn of commercial reinsurance protection on January 1, 2017. At the start of this year, that increased once again to $1.46bn of commercial market protection, a level that has further risen with the NFIP purchasing another $500m of coverage from the capital markets on August 1, 2018.
In total, that gives the NFIP $1.96bn of commercial market protection - equal to approximately 20% of the losses sustained by the scheme from 2017's Hurricanes Harvey, Irma and Maria, but, as Maurstad noted, certainly a step in the right direction.
Despite embracing the coverage available from the commercial market, more work needs to be done to ensure the program remains economically viable in the future.
“By providing us with the extended debt limit that started in the Katrina Wilma and Rita years of 2005, that gives us the ability to, in a timely way take care of our policyholder's claims payments,” Maurstad said.
The program was not necessarily meant to handle the steady flow of catastrophic events that have occurred since then he explained.
“The subsequent Hurricane Sandy-type of events, including the Louisiana event, which was the largest non-hurricane rainfall incident in the history of the program, and then last year with Harvey, Irma and Maria - the program can’t sustain that level of catastrophic activity year after year by borrowing from the Treasury."
“It is and needs to be a discussion with Congress on what the best path, over say a 20 year period, is to support the program, through either a sound financial framework which includes borrowing funds that can be repaid within a reasonably short period of time, reinsurance and at a level above both of those, appropriation."
"Either that or the program will have to operate with long-term debt, regardless of what the current interest rate is. We’re going to continue to have discussions on how to deal with the current debt levels,” he said.
“It is our belief that the program could function better, and cancelling the debt would be a piece and a part of the development of a sound financial framework," he said when questioned over whether cancelling more of the program’s debt was a viable long-term solution.
Congress forgave $16bn of the program’s debt last year ahead of an estimated glut of claims from Harvey Irma and Maria, although actual claims are now projected to be less than $10bn according to a Congressional Research Service report.
The programme was estimated to be $20.523bn in debt as of April 2018, according to a FEMA Affordability Framework report.
Despite the stalemate over the programme in Congress, Maurstad and the NFIP are tackling some issues on their own.
“We’re doing two things that we believe will be supportive of achieving our goals at the NFIP. We’re developing what I call a new suite of insurance products. Currently, the actual policies are written in a fashion that is a few generations old. We’re trying to align the flood insurance policy with the industry standards of today,” he said.
“For example instead of requiring a policy for both the building and a separate policy for the contents, with separate limits, coverage and deductibles, we’ll have something more like a traditional homeowner’s policy, which would dove the dwelling and the personal property."
“So one effort that we have underway is to develop a new suite of products, including a homeowner’s flood, a renter’s flood, a small business flood, a condo flood, which would make things simpler and provide more options for the policyholder.”
Additionally, Maurstad is aiming to have policies written in simpler language.
“We would write the policy in simpler easier to understand language that is more in line with how insurance policies are written today, to improve the customer experience for policyholders or potential policyholders,” he explained.
This simplification would benefit policyholders and adjusters alike, Maurstad said.
“Because it’s simpler and less complex, the policyholder will better know what’s covered and what’s not, and so the adjusters will have a better experience as well."
“The second thing we’re doing is looking at the way we’re determining the premium for the policyholders, so we’re looking to see what information we have to capture that can best illustrate the risk, so we can charge premiums commensurate with the risk that the property owner has."
Under Roy Wright, the previous director of the NFIP, the Federal Emergency Management Agency, which is the parent organisation of the flood programme, there were several schemes put forth detailing different ways to assess premiums, including suggestions to partner with the Internal revenue Service as well as States and the Small Business Administration.
“We believe that we can improve on our current risk rating structure, which will continue to support policyholders," Maurstad said.
But he is also under no impression that things will move quickly.
“Under the current circumstances, the terms and conditions of our insurance policies are governed by statute and the regulatory process, which should come as no surprise.
“All of this is not necessarily a streamlined process in comparison to the private sector, so we’ll have to work through the regulatory process which can take some years to do, but the most important thing is that we’ve started it and we’re going to continue it until we’re able to take it to market,” he said.