There is a growing consensus that the NFIP needs reforms. The Federal Emergency Management Agency (FEMA), which is responsible for the NFIP, has recently proposed several reform options, including privatization of flood insurance. Many believe, though, that private flood insurance will always be more costly than what the NFIP currently charges.
However, an innovative study by the Wharton Risk Center with state-of-the-art probabilistic catastrophe flood modeling conducted by CoreLogic®, suggests otherwise.
The Risk Center analyzed the likelihood of future catastrophic flooding – and the potential cost of providing private flood insurance–in a pilot study focusing on two flood-prone counties in Texas. The study found that prices charged by private insurers could potentially be lower than current prices charged by the NFIP in some parts of those counties.
The analysis calculated the “actuarially fair” flood insurance premium, based on the probabilistic risk models, for more than 300,000 residences in Galveston and Travis Counties. The Wharton study then compared these rates to the rates currently charged by the NFIP.
Based on those estimates, the report shows in the regions analyzed that there are certain areas where NFIP premiums, are, on average, “too high” (and other areas where premiums on average are “too low”).
This study, released by the Wharton School of the University of Pennsylvania in December, is a real eye-opener. Can private insurers make money writing flood insurance outside the National Flood Insurance Program? The study suggests that the answer may be "yes."
Given Congress's apparent inability to move NFIP reform higher up on its agenda, perhaps it's time that the insurance industry as a whole start to discuss the potential merits of insuring flood privately. What do you think? Will it work? Make matters worse? Have no effect because no one will buy it anyway? Let's have a "tidal wave" of comments.*
* Yes, I know it was a terrible joke, but I'm unable to help myself.