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Study confirms that flood insurance program needs reform, p. 1

President Obama reauthorized the National Flood Insurance Program in January, for what seems to be the hundredth time in recent years. In Congress, a long-term NFIP reauthorization bill passed by the House last summer languishes in the Senate, in spite of the efforts of a bipartisan group of senators. The 41 lawmakers recently sent a letter to Senate leadership urging them to make the insurance program a priority.

One issue that holds up both reform and long-term reauthorization is that flood insurance is not as important in some states as it is in Florida and other Gulf Coast states. In less flood-prone regions, insureds find themselves paying premiums for insurance they seldom need. For private insurance companies, the premiums aren't nearly high enough to cover what they pay out in claims. It's a lose-lose situation.

Researchers at the Wharton Risk Management and Decision Processes Center reviewed claims data from 2011 and confirmed early predictions: Last year's natural disasters broke records by racking up $350 billion in claims worldwide. As far as NFIP is concerned, hurricanes and floods in the U.S. accounted for two-thirds of the almost 100 declarations of disaster by President Obama.

All of this just piles on to NFIP's $17.8 billion debt load. The program has carried most of that debt since the 2005 and 2008 hurricane seasons -- the same seasons that prompted more private insurers to exit flood-prone states.

The obvious answer to NFIP's problems would be to lure private insurance companies back into the market. The study suggests it's possible.

We'll get into the details in our next post.

Source: Risk & Insurance, "Federal Flood Insurance Program Gets Extension," Jon Campisi, Jan. 24, 2012

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