WASHINGTON (Jan. 25, 2006)—The National Association of Mutual Insurance Companies (NAMIC) commends Chairman Richard C. Shelby, R-Ala., and the Senate Banking, Housing and Urban Affairs Committee for holding a hearing this morning on “Proposals to Reform the National Flood Insurance Program.”
“NAMIC applauds Chairman Shelby for holding this timely hearing and for making this issue one of his committee's top priorities,” said NAMIC Federal Affairs Senior Vice President David A. Winston. “We agree with Senator Shelby that the NFIP must be reformed, as we want to avoid the situation of last November when FEMA instructed WYO companies to cease making all claims payments.”
“NAMIC, along with its coalition partners, have come up with common-sense reforms that we believe would be a substantial first step in reforming the program,” said Winston.
Witnesses at the hearing were: Mr. David Maurstad, acting director, mitigation division, FEMA; the Honorable David M. Walker, comptroller general of the United States; and Mr. Donald B. Marron, acting director, Congressional Budget Office.
The NFIP is designed to address the increasing costs of taxpayer funded disaster relief for flood victims and the increasing amount of damage caused by floods. With private insurers unable to underwrite the risk of massive floods, it became clear that some form of a federal program must be created. The program is designed so that the premium dollars that are taken in every year are used to pay out any flood losses that are incurred by policyholders. The program was also designed to utilize the already existing distribution system that exists in the private market. While all the premiums collected, and all claims that are paid out go directly in and out of federal accounts, more then 90 percent of all flood policies are written through Write Your Own (WYO) Carriers. When a claim is made, the WYO will process the claim, and make payment with government reimbursement.
The year 2005 proved to be too costly for the program. The flood losses were so great in the first 10 months of 2005 that the estimated claims are expected to exceed $30 billion. These claims are greater then all claims the NFIP has paid out from 1968-2004 combined.
Due to the extraordinarily large number of claims, the NFIP quickly ran through all of its funds. On Nov.14, 2005, the acting head of the NFIP sent a letter to all WYOs informing them that they should stop paying all claims on flood policies until further notice.
In response to this crisis, NAMIC and its coalition partners lobbied Congress to quickly pass legislation that would allow the NFIP to borrow money from the Treasury to pay out its obligations. After several days of negotiations, both the House and Senate agreed that a more long-term fix was needed to get the program through the year. In the end, the bill was amended to increase the borrowing authority to $18.5 billion. However, to be able to pay out all claims arising from floods in 2005, it is estimated that the NFIP will have to have its borrowing authority raised to anywhere between $25 billion and $32 billion.
“In the near term, NAMIC believes that Congress should authorize an additional $5.1 billion in borrowing authority to preserve the viability of the NFIP so that insurance companies can pay out all claims to those people who were responsible enough to purchase flood insurance,” said Winston. “NAMIC will continue to work with Congress to ensure that any reforms that are put in place will help strengthen the program, not weaken it.”
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Rick Nelson, APR, CAE
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Posted: Wednesday, January 25, 2006 12:00:00 AM. Modified: Wednesday, January 25, 2006 3:08:47 PM.
317.875.5250 - Indianapolis | 202.628.1558 - Washington, D.C.