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Mixed bag on flood reform

By Jay MacDonald · Bankrate.com
Friday, July 15, 2011
Posted: 9 am ET

Good news and bad news on flood insurance this week. The good news: The House overwhelmingly approved a bill that would reauthorize the National Flood Insurance Program for five whole years. The bad news: It would bump the annual rate increase limit from 10 percent to 20 percent.

House passage of the Flood Insurance Reform Act of 2011 by a vote of 406-22 was roundly applauded by the insurance industry, which in the case of flood insurance should not be taken as a good sign by all consumers.

Yes, having the program authorized for five years will relieve real estate agents, mortgage lenders and home buyers and sellers of the annoyance of having their impending homes sales thrown into limbo every six months while lawmakers drone on about NFIP solvency.

But if you own a home in a flood plain, as I do, you're probably not going to be cheering about the impact this bill could have on your flood insurance rate in the short term. Here's why:

Experts agree that NFIP is a flawed program. It's currently more than $18 billion in debt, thanks to the 2004 and 2005 storm seasons that blew a Katrina-size hole in its bucket. In 2009, the Government Accountability Office decreed that NFIP is "by design, not actuarially sound," in part because "it's not structured to do things that most insurance companies do to mitigate risk, such as build a surplus fund or purchase reinsurance to cover catastrophic losses."

The reform bill tackles some of these shortcomings by offering policyholders a mixed bag of sticks and carrots

On the stick front, it would phase out taxpayer-subsidized rates and raise the cap on annual premium increases from 10 percent to 20 percent. Translation: Brace to pay at least double the annual increase you're used to. It's unclear yet what removing the taxpayer subsidy would do to new-policy rates, but I'm guessing it won't lower them.

On a (possible) carrot front, the bill would eliminate barriers to a private flood insurance market and phase in risk-based premiums. The former could open the door to competition from private insurers, which at least has the potential to lower rates in the future, while the latter could help lessen the load on the policy pool of the more flood-prone properties, including high-risk buildings that are subject to repeat claims.

The House also approved an amendment to the bill that would allow private insurers access to nearly 800,000 flood policies -- roughly 15 percent of the $3.3 billion flood insurance market -- that reverted to federal oversight when State Farm ended its participation in NFIP's "Write Your Own" program this time last year. State Farm opposes the move, which would give its competitors access to its former customers.

The bill now moves to the Senate, where backers hope for passage in time for a presidential signature by Sept. 30, when the program is set to expire once again.

It's a relief to see decisive movement of any kind to shore up the financial strength of the flood insurance program. To eliminate NFIP, as one House member proposed without success, would be a disaster.

Let's just hope the details of this reform package are relatively free of devils.

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