The clock is running down for lawmakers to prevent an impending October 1 government shutdown, and there could be significant consequences for flood insurance and the National Flood Insurance Program (NFIP) if no deal is brokered.
The NFIP, which is administered by the Federal Emergency Management Agency (FEMA), is authorized through to September 30.
If a shutdown is not prevented, property owners and renters could forego flood insurance or face finding cover in the private market, AM Best has warned.
Up to 1,300 property sales per day that rely on the NFIP for mandatory flood cover could be in jeopardy, the National Association of Realtors has cautioned.
Further, flood insurance is at present funded to a $2.4 billion limit. Claims would be paid, but only to the authorized limit, according to AM Best.
“Once that money runs out, no more claims will be paid,” the ratings agency said in a research brief.
The US is past peak hurricane season, but could still face October storms, which can be “numerous”, AM Best said.
Both Hurricane Michael and Superstorm Sandy took place in October, and AM Best cautioned that a storm of a similar magnitude “could exhaust current NFIP funding on existing policies.”
“Closings on properties requiring flood insurance would be delayed, as would new Federal Housing Administration loans, which would impact property sales and purchases of property insurance and title insurance,” said Christopher Graham, senior industry analyst, Industry Research and Analytics, AM Best.
On Wednesday, Trevor Burgess, Neptune Flood CEO, urged Congress to work together to prevent a “shutdown of critical FEMA activities like the NFIP program as the program plays a critical role in helping protect homeowners from the catastrophic risks of flooding”.
The NFIP acts as the US insurer of last resort for flood insurance policies, meaning it takes all comers. In past instances of government shutdowns, the national insurer has been prevented from taking on new policies, but has promised renewing policyholders retroactive coverage, a flood insurance expert told Insurance Business.
“We anticipate that this will be the case if we do not avoid a government shutdown in the near term,” said Craig Poulton, Poulton Associates CEO. “In this event the private flood insurance market will likely facilitate at least 80% of the newly originated flood insurance demand exhibited during the shutdown.”
The NFIP is intended to serve as a flood insurance stopgap and moves have been made to encourage individuals into the private market. However, it currently serves more than five million policyholders nationwide and is the nation’s largest single-line insurance program, providing nearly $1.3 trillion of flood coverage, according to FEMA.
The program is delivered through a network of more than 50 insurance companies and the NFIP direct.
“If the private market for flood insurance had been allowed to develop unimpeded by well intended actions on the part of the NFIP, any government shutdown would likely not be worth mentioning as the private market would continue on, government shutdown or not,” Poulton said.
Poulton predicted difficulties for some flood insurance buyers, but said he hoped there would be a “silver lining”.
“While a government shutdown will create some pain for a limited number of flood insurance buyers it will also increase awareness of the opportunity for premium savings and enhanced coverage in the private flood insurance market as well as removing millions of dollars in future NFIP taxpayer subsidized losses from the back of the American taxpayer,” Poulton said.
In Poulton’s experience, a government shutdown can pre-empt a new segment of the insurance production community being converted to private market alternatives. Poulton predicted a “significant uptick” in private market submissions in the event of a shutdown as producers look for solutions outside of the NFIP.
“There is indeed a lingering positive impact not just for the purveyors of private market flood insurance and for the flood insurance market as a whole since more producers and their clients wake up to what is often better pricing and better coverage in the private market,” Poulton told Insurance Business.
CATCoverage, which has been selling private flood insurance for 20 years and is administered by Poulton Associates, is “committed” to playing its part to plugging any government shutdown gap, Poulton said.
Neptune, too, said it is on hand to assist in the event of a shutdown.
"Neptune is large enough to help tens of thousands of additional American homeowners in case of a government shutdown,” said Neptune's Chief Customer Officer, Jean-Luc Eckstein. “We can help home buying stay on track.”
