Fixing the leaks in the NFIP: Best's Review survey shows that insurance professionals across the industry want to shore up the national flood program.

Now that the National Flood Insurance Program has proven to be significantly flawed, voices across the industry are calling for an increase in the program's maximum coverage limits, the mandating of stricter building codes and compliance with those codes, and the inclusion of additional living expenses, according to a recent survey by Best's Review. Only 27.4% of respondents said the program should be fully privatized.

The majority of survey respondents were insurers and agents, with 34.5% hailing from agencies, brokerages or adviser organizations and 33.5% from insurance companies. The rest came from around the industry: stock analysts, consultants, arbitrators, reinsurance intermediaries, risk managers, actuaries, underwriters, attorneys, regulators, government employees, excess & surplus lines, and even life and health insurers. One respondent simply offered this description: "taxpayer."

The unifying element among the group seems to be the question of flood reform: Almost two-thirds of respondents, 63.9%, felt the flood insurance program definitely needs help.

A little more than haft, 52.2%, asked that the program expand mandatory coverage to include those with mortgages through state banks that aren't federally insured, and for those who own their homes. Another 50.2% would like to see the elimination of subsidies for commercial properties and second homes.

"Expanding mandatory coverage will increase available funds and reduce the public 'bail-out' of uninsured," said an industry consultant. "I would support an 'opt-out' provision, though that would prohibit those who opt out from any further public assistance after a disaster."

A respondent from an agency, brokerage or adviser group agreed: "Since this is a government program, you need to get full participation in order for it to remain liquid. The biggest problem I see is that people will collect from the government (through FEMA, etc.) when they have a loss, regard less of whether or not they've been paying premiums into the system."

As for eliminating subsidies, several respondents had strong opinions.

"Those who build on barrier islands and other coastal areas prone to flooding should pay for their own coverage," said an insurer.

"Further development and construction in flood-prone areas will continue unless the occupants pay the full cost for residing in that area," said another insurer. "Continued development in these areas is one of the most catastrophic risks facing this country. Why should taxpayers outside of those areas subsidize such high-risk exposures?"

In order to reduce the number of repetitive loss properties--those homes with two or more flood claims of $1,000 or more in a 10-year period--50.5% of respondents said they'd like to see reform of the law to offer government aid to homeowners in flood plains to either raise their properties substantially or move out.

"Increase the deductibles. A flood deductible should be substantially higher than a fire deductible" noted an insurer. "If someone's basement keeps getting flooded, it is a basement, after all, and not a living space--having basement damage that was converted from a true basement is not, to me, a flood loss. It is the homeowner's risk and should be treated as such."

"Subsidized insurance simply should not be available to repetitive loss properties" said another. And yet a third insurer noted, "Why wait for two losses? One should be enough."

"I'm afraid none of this would work in the aftermath of Katrina," an agent/broker said. "Trying to revamp the program around this disaster just doesn't work. The federal government needs to concentrate on stopping coastal erosion and building levees that don't fail."

Mandates for retrofitting for hurricane protection were popular among respondents, as was the inclusion of replacement cost of contents and business interruption coverage.

"Limits for additional living expenses and BI should be modest, perhaps 25% of limits," said one insurer.

"Most important are ALE and BI," said an agent/broker. "It would be great to be able to offer some coverage, even if only an option."

Another agent/broker suggested that a nominal amount of coverage for travel costs/emergency evacuation should be included, provided the occupant evacuates at least 48 hours prior to landfall of any named storm: "We can't have so many people waiting until the last minute."

"Add the [replacement cost] of contents only if it is an option to be added and not mandatory," said another agent/broker. "Many clients do not even want any contents coverage at all. Also, if the flood policy were to act as a universal endorsement to the homeowners policy, business interruption, etc., could still be covered. Many changes need to be made to this system before I will be confident in its ability to pay."

What changes should be made to the National Flood Insurance Program?

"NFIP should be the insurer of last resort, not the insurer of first resort. Privatization should be pursued with NFIP available only for those risks unplaceable in the commercial marketplace."

--Other insurance-related company or organization

"Individuals who do not have a mortgage are not incented to buy the coverage but want the government to pay for the loss. To truly make it mandatory (and funded), it should become a flood tax. The assessment should be based on elevation, building code conformance, protective barriers (seawalls, dunes) and value. Take the 'voluntary' out of it. Take the mortgage company out of it. Take the insurance company out of it."

--Insurance company

Which change is most important and why?

"Loss of use and business income. In the event of a catastrophe resulting in flood, loss of use and income have been the biggest detriment to reconstruction in New Orleans."

--Agency, broker or adviser organization

"Mandatory coverage for all in a flood zone; reason: New Orleans. Eliminate subsidies for second homes; reason: U.S. taxpayers should not be responsible for someone's second home. Limit amount of payout on high-valued homes; reason: U.S. taxpayers should not be responsible to rebuild a McMansion."

--Agency, broker or adviser organization

"Coverage limits are not enough to indemnify most homes anymore. Why purchase flood insurance if you are not going to be able to replace your house anyway?"

--Insurance company

Which change would help insurers and agents the most and which one would hurt them most?

"I do not think any change would hurt an agent. Flood isn't something that is paramount in most agents' minds because most insurance companies do not ask the flood zone question when writing a homeowners policy. So I suspect most agents do not bother to deal with it."

--Insurance company

"Agents would be helped the most if it could be an endorsement to the homeowners, like earthquake, to keep it easier to sell and more convenient for consumers. Fully privatizing the program would be bad; look at what is happening to the homeowners rates in Florida and other Southern states."

--Agency, broker or adviser organization

"Fully privatizing, which on the surface looks like a good idea because the government would be out of it. But I think it would be the worst. The inability to get the needed spread of risk, and the gross adverse selection inherent in flood insurance, would make it unprofitable and do nothing but put agents and companies in a no-win position at the time of loss."

--Insurance company

To reduce the number of repetitive loss properties, the program should:

"Consider surcharging those properties that are repetitive loss properties where the owners do not remediate and/or discontinue their ability to participate in the NFIP program. If coverage is required for a mortgage, they would be required to place with excess/surplus lines, and costs would be prohibitive, which in effect, would force the remediation or move."

--Agency, broker or adviser organization

"If you want to live where you are exposed to floods and hurricanes, you should be prepared to pay more for the luxury."

--Taxpayer

"Require that anyone who receives federal assistance during a 'disaster' be required to obtain flood insurance going forward."

--Investment management

What types of coverage should be added to flood insurance?

"Make flood a covered peril under all U.S. property policies, including backup of sewers and drains. Build the cost into everyone's property insurance."

--Agency, broker or adviser organization

"None. Private industry will fill voids on coverage gaps that are not catastrophic in nature."

--Insurance company

"Instead of adding to flood, add the flood coverage to homeowners."

--Insurance company

"Extra expense for those businesses that have the ability to continue operating at a new location, but need financial help to defray the expenses associated with relocating. Builders Risk, since most of these policies are now excluding the exposure."

--Agency, broker or adviser organization

What changes should be made to the
National Flood Insurance Program?

Reduce subsidies to policyholders       36.3%
Eliminate subsidies for
commercial properties and
second homes                            50.2%
Full privatize the program              27.4%
Increase maximum
coverage limits                         53.2%
Other                                   43.8%
Expand mandatory coverage
to include those with mortgages
through state banks that
aren't federally insured and those
who won their homes                     52.2%

Note: Table made from bar graph.

To reduce the number of repetitive loss properties
(those with two or more flood claims of $1,000 or
more in a 10-year period), the program should

Mandate other forms of retrofitting for
hurricane protection                        39.2%
Mandate stricter building
codes and compliance
with those codes                            72.2%
Other                                       28.9%
Mandate a provision of the 2004 flood
reform law that offers owners
government aid to either raise their
properties substantially or move out        50.5%

Note: Table made from bar graph.

What types of coverage should be added
to flood insurance?

Business interruption            38.4%
Additional living expenses       57.9%
Replacement costs of contents    48.9%
None                             27.9%
Other                            18.4%

Note: Table made from bar graph.

If subsidies are reduced and premiums are
increased at the proposed 15% a year, what
percentage of your homeowners business
are you likely to lose because of people
fleeing flood zones?

0%             63.9%
10%            29.7%
30%             3.9%
50% or more     3.2%

Note: Table made from bar graph.

Education and knowledge of flood insurance
among producers is

Excellent      3.8%
Adequate      33.5%
Needs help    63.2%

Note: Table made from bar graph.

What is your work?

Agency, brokerage or adviser
organization                                34.5%
Insurance company                           33.5%
Other insurance-related company or
organization                                15.2%
Other                                       22.3%

Note: Table made from bar graph.

REFLECTIONS: In the aftermath of recent catastrophes and with the 2006 hurricane season under way, insurance professionals say changes are needed in the National Flood Insurance Program. At left, a home in Lowell, Mass., after flooding in May.