WASHINGTON (12/21/11)--Premiums charged to policyholders under the National Flood Insurance Program (NFIP) are, in some areas, "too high," and allowing more private insurers to enter the market could increase coverage for many homeowners and lower their flood insurance costs, a recent study by the University of Pennsylvania's Wharton School said.
The Wharton study focused on Galveston and Travis Counties, two Texas counties that are frequently impacted by floods, and calculated "actuarially fair" flood insurance premiums for more than 300,000 residences in these counties.
These calculated rates were compared to actual rates charged by the NFIP, with some of the calculated rates coming in higher than the NFIP rates and some featuring lower totals than the NFIP rates. NFIP premiums were double the calculated rates in a moderate flood risk area of Travis County, and were 16 times the calculated rate in portions of Travis County, which has a lower risk of flooding.
"This presents opportunities for private insurers to provide coverage in some of those areas, to complement the NFIP," study co-author Erwann Michel-Kerjan said.
"There are several practical barriers that would need to be addressed for private insurers to sell such coverage, but if done, this could significantly increase the number of residents with proper coverage, thus reducing the need for government disaster relief," he added.
The NFIP is important to credit unions because the mortgages they write for properties in a floodplain are required to have flood insurance.
The NFIP is administered by the Federal Emergency Management Agency, and was established after private insurance entities refused to offer flood insurance. It is typically reauthorized every few years.
The insurance program will be extended until May 31 once President Barack Obama signs a $1 trillion omnibus federal government funding bill into law. That bill was approved by both branches of the U.S. Congress late last week.
The NFIP was set to expire on Dec. 16. That program has been funded by short-term resolutions for months, as both Democrats and Republicans, including Senate Banking Committee Chairman Tim Johnson (D-S.D.) and ranking minority member Richard Shelby (R-Ala.), have called for the program to be reformed.
The Credit Union National Association supports the short term NFIP extension, but has said a longer term extension should be considered.