Florida’s private flood insurance market is a template for the country

The National Flood Insurance Program is in deep debt. A handful of big storm years, particularly in 2005 and 2012, along with the artificially low rates charged to many of its policyholders, has left the program $24.6 billion in hock to the U.S. Treasury, with no practical way ever to pay it off.

With Congress set to deliberate this summer and fall on how best to restructure the federal program, which Americans have relied on for their flood insurance needs since 1968, there actually is a model for how to restore fiscal sanity to an out-of-control government insurance program, while still taking into account the real and politically delicate issue of affordability. On this, Congress can and should look to Florida.

{mosads}A little more than a decade ago, Floridians were reeling from an insurance affordability and availability crisis that came in the wake of seven major hurricanes striking the state from 2004 to 2005. Those problems were exacerbated by the knee-jerk machinations of state lawmakers whose 2007 insurance “reforms” tried to lower rates artificially. The effort forced many insurance carriers to write fewer policies or exit the market altogether.

The result was that Florida’s Citizens Property Insurance Corp. — the state’s government-run insurer of last resort — ballooned to 1.5 million policies. State taxpayers effectively were floating $500 billion of risk exposure, with no conceivable way to cover potential claims without a massive bailout from the federal government.

Sound familiar?

Accepting that Florida was one hurricane away from a fiscal calamity, the legislature started to correct itself in 2010 and enacted the first of several reforms to rehabilitate the state’s insurance market and restore Citizens as a true insurer of last resort.

First, they unfroze Citizens’ artificially suppressed rates by implementing a “glidepath” that gradually increased them. This not only helped to shore up the company’s finances but most importantly, encouraged policies to migrate back to the private market organically.

As Citizens’ rates reached market parity, private companies began to return to regions of the state that previously had no private carriers. Elsewhere, the return of private capital increased choice and competition — and took billions of dollars of risk off taxpayers’ backs. Additionally, Citizens pursued an aggressive “depopulation” program that matched their policyholders with private companies interested in offering comparable coverage at similar prices. 

Lawmakers also strengthened eligibility requirements by making certain homes ineligible for Citizens coverage. In 2012, eligibility was capped to homes valued at less than $1 million. In 2013, lawmakers further restricted eligibility, gradually ratcheting it down to the current cap of $699,999. In 2014, new construction in the state’s highest-risk coastal areas became ineligible for coverage.

Finally, Citizens’ managers also made the decision to take advantage of historically low reinsurance rates to add additional layers of protection to insulate taxpayers from the need to bail Citizens out should disaster strike.

Thanks to these aggressive actions, Florida’s state-run insurer has shed more than 1 million policies and its risk exposure declined from about $500 billion to $142 billion since 2012. Today, Florida consumers enjoy a robust private insurance market that coexists with Citizens, which has reverted back to an insurer of last resort.

Like Citizens, the NFIP has started to take advantage of historically low reinsurance rates, moving in January to transfer $1.042 billion of flood risk to reduce the need for future taxpayer bailouts. It can go further still on that front. The program also can and should accelerate its efforts to phase out subsidies in high-risk or repeat-loss areas, removing artificial incentives to build, and devote more resources toward mitigation, which has been shown to save $4 in taxpayer response and recovery costs for every $1 spent. 

Finally, Congress must encourage the fast-growing private market for flood insurance by passing legislation like the Flood Insurance Market Parity and Modernization Act, which moved through the House of Representatives unanimously last year. The private market would be better able to gain a foothold if Congress were to clarify rules around which private policies qualify for federal lending requirements; tweaked the definition of “continuous coverage” so that it includes privately insured properties; removed restrictions that bar NFIP Write Your Own insurers from also writing private flood policies; and made underwriting data gathered by the Federal Emergency Management Agency open to private companies to use.

Given the NFIP’s 50-year de facto monopoly over flood insurance, the emergence of a private flood insurance market will not happen overnight. However, congressional lawmakers can and should view Florida as a template for NFIP reform that can help it gradually to transform into the nation’s flood insurer of last resort.

Christian R. Cámara (@ChristianCamara) is a senior fellow at the R Street Institute.

The views expressed by contributors are their own and are not the views of The Hill.